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Did you know the IRS has over 100 types of penalties?!
The bummer is that most of them compound monthly! The even bigger bummer is that the INTEREST compounds DAILY on the taxes AND penalties AND interest! The most prevalent penalties for Income Tax filings are Late Filing the Tax Return, Late Paying of the Taxes due on the balance, and Underpayment of Estimated Tax Penalty. Fortunately the IRS also has the ability to abate the penalties for reasonable cause.
The Penalty for Late Filing is 5% per month for the first 5 months (actually it’s technically 4.5%, but the other 5% is for Late Paying). So this penalty adds up to 25% really fast and it is capped at the maximum of 25%.
However the Late Paying Penalty of .5% continues after the Late Paying Penalty caps. It can add up to another 25%!
The Underpayment of Estimated Tax Penalty is basically a penalty that is more like interest on the estimated taxes that should have been paid quarterly throughout the year. It stops on April 15th, and then the other penalties kick in. It is based on your total liability for the year as well as what was paid in the prior year. They allow an exemption for amounts paid that at least equal the last year’s taxes (for higher income individuals the exemption is for paying at least 110% of last year’s taxes).
If you have payroll taxes, the penalties are even stiffer for late paying or underpaying these taxes. There are also penalties for not making the payroll tax deposits through the banking systems (Federal Tax Deposits are to be paid to the IRS via the banking system), and penalties for not paying the deposit to the bank soon enough. These penalties on top of the other late filing and paying penalties!
Any time there is a tax problem it is worth considering requesting an abatement of the penalties. The IRS standard is pretty high when it comes to waiving penalties but if you have a good reason the IRS can waive some or all of them. In some cases, under the new fresh start provision, the IRS can waive penalties even if you don’t have a good reason! It’s called the first time abatement program and is very helpful if you have an otherwise good history for the 3 years prior. In any case, it’s guaranteed the IRS will not abate a penalty if you don’t ask! If you want help dealing with the IRS abatement of penalties, please give us a call and schedule an appointment as soon as you can. Sometimes timing is everything so don’t let this go too long!