31 July 2015

The IRS levies two requirements on taxpayers. The first is that we pay our taxes. The second is that we file an accurate income tax return by the specified due date. Failing to file your tax return on time and failing to pay your taxes when due can both result in penalties from the IRS. You might think failing to pay would result in the larger penalty than failing to file, but that generally isn't true. Failing to file your tax return can result in a penalty of 5% of the tax owed per month, up to 25% of the total tax owed. Failing to pay your taxes can result in a penalty of 0.5% of the tax owed per month, up to 25% of the total tax owed. The IRS will also charge interest on overdue taxes owed. Technically interest isn't a penalty, but don't try to tell that to someone who is paying it. It sure feels like a penalty.

Note, though, the penalties are assessed on taxes owed. Therefore if you don't actually owe any taxes, there is no penalty for failing to file your tax return on time. You're still supposed to - you might even be entitled to a refund - but the IRS can't penalize you for not filing unless you also owe tax.

Penalties are sometimes undeserved. It's not uncommon for a taxpayer to believe they are complying with the law, but an error on the tax return triggers penalties. For example, tax forms get mailed to an old address, or an employer does not send the required tax documents and the taxpayer does not realize s/he has a missing form at tax time. They think they have all the forms needed to complete their tax return, but they don't. Fortunately, taxpayers are not always stuck paying a penalty just because the IRS demands one.

Taxpayers can challenge the IRS's decision to impose a penalty for failing to file or failing to pay in a timely manner under a program known as First Time Abatement. The taxpayer must meet two criteria in order to qualify for First Time Abatement. They must not have any overdue tax returns or outstanding taxes owed. This is known as filing and payment compliance. The taxpayer must be up to date on all filings and tax payments. The second condition is the taxpayer must not have been assessed an IRS penalty in the three previous tax years. This is known as having a clean penalty history.

That's it - if you're currently compliant with your tax filings and payments and you have a clean penalty history for the last three years you can have failure to file and failure to pay penalties imposed by the IRS abated. There is no guarantee your penalties will be abated, but the onus is on the IRS to demonstrate a good reason to not abate your penalties if you qualify for this program. 

First Time Abatement can be requested via telephone, through the IRS website, or in writing. You can also authorize your tax preparer to apply on your behalf.

If you've never heard of this program there may be a good reason for it. The IRS does not advertise it. They suspect if taxpayers knew about penalty abatement that more taxpayers would attempt to cheat the system. Fear of penalties keeps many of us on the straight and narrow. They are probably right about that, but there's no reason taxpayers should pay penalties if they qualify for First Time Abatement. Just like deductions and credits, it is a form of tax relief that should be utilized whenever available.

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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