Penalty Abatement Request
Taxpayers faced with past due tax bills are often confronted with penalties which exacerbate the situation. Penalties can be as much as 100% of the tax owed. Taxpayers that can show “reasonable cause” as to why they did not comply with the procedural rules can often get a Penalty Abatement, or removal of the penalties from the account. Each penalty has different factual situations that constitute “reasonable cause” under the law.
There are a variety of penalties that the IRS and other taxing authorities assert against taxpayers:
- Failure-to-File / Late Filing Penalty – this penalty occurs when a taxpayer does not file his or her tax return or does file but does so after the deadline for filing the particular return.
- Failure-to-Pay / Late Paying Penalty – this penalty occurs when a taxpayer does not pay the full amount of the tax due with the return when the payment is due.
- Failure-to-Deposit Penalty – this penalty occurs when a tax deposit (frequently payroll tax deposit) is not made when the tax deposit is due or the deposit is made but is made incorrectly.
- 100% Trust Fund Penalty – this penalty occurs when withheld employment taxes (considered “trust fund” taxes) are not paid to the taxing authority. This penalty is often asserted against “responsible persons” such as owners, executive managers, payroll managers, etc.
- Estimated Tax Penalty- this penalty occurs when a taxpayer with income that is not subject to withholding fails to make estimated tax payments during the year.
The Failure-to-File Penalty accrues rapidly and can result in a penalty equal to 25 percent of the unpaid taxes. Thus, individuals who may not be able to pay all of the taxes owed should still file a return. Thereafter, they can explore payment options. If you file your return more than 60 days after it is due, the minimum penalty is the lesser of $135 or 100 percent of the unpaid tax.
The Failure-to-Pay Penalty accrues very slowly but given time can result in a penalty equal to 25 percent of the unpaid taxes. If during a given month both the Failure-to-File Penalty and the Failure-to-Pay Penalty apply, the 5 percent Failure-to-File Penalty is reduced by the Failure-to-Pay Penalty. For taxpayers who file on time, the Failure-to-Pay Penalty is reduced to 1/4 of 1 percent per month for each month the taxpayer has a valid Installment Agreement in effect.