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You receive a notice from the IRS indicating that you owe penalties for either failure to file on time, late payment, and/or missed employment tax deposits. Before you make that payment, read this article first. Then seek out professional help from your tax professional for additional guidance. .
Did you know there could be several strategies that you can use to avoid or, at least, significantly mitigate the penalties.
Knowing what types of penalties you may be facing can go a long way. Here are some of the most common IRS penalties:
1. Late Filing Penalty
Personal and C corporation returns can be very costly to file late - up to 5 percent of unpaid tax per month past the return due date. This will cap out at a maximum of 25 percent.
For S corporations and partnerships, the penalty is $245 per partner or shareholder for each month of late return filing.
For example, you owe a tax of $1,000. You filed your return three months after the due date. Then, in this case, you could be charged with a penalty amounting to $150 (5% per month times three months).
2. Late Payment Penalty
If you submit on time, but pay your taxes late, you have a penalty of 0.5% of unpaid tax for every month, up to a maximum of 25%.
That means that if you have $1,000 in taxes unpaid, and you do not pay for two months, then you are going to owe an additional $10.
3. Penalties for Non-Filing and Failure to Deposit Employment Taxes
Businesses that miss on-time payroll tax deposits are hostages to an enormous amount of penalties, which range from 2% to 10%, depending on how past due the deposit was.
Miss one payroll tax deposit for $2,000 and charges start adding up fast.
But fear not! If you're tallying one or more of those penalties together, here are a few strategies that can be useful in helping you steer clear of, or even wipe them clean:
1. First-Time Abate
If this is your first penalty-or your first penalty in more than three years-you might qualify for a "first-time abatement." This is an easy and very commonly used way to have penalties abated for late filing, late payment, or failure to deposit.
For example, if you have never been late in filing a tax return and you otherwise have a good compliance history, a phone call to the IRS stating you wish to have your first-time abate processed often erases the penalty. Use this one time gift wisely.
2. Partnership Relief
If you have ten or less partners in your partnership and each of its partners filed in time, you may qualify for relief under Revenue Procedure 84-35.
It is an unusually low-key but very effective way by which smaller-size partnerships can indeed avoid paying penalties outright.
For instance, you and your nine other co-applicants filed in due time, but one of the partners did not, which does not make you ineligible for relief under procedure.
If none of the above best describe your situation, you may file for penalty relief showing that you have a good reason for the delay in filing or paying your taxes.
Good reasons could be a serious illness, natural disaster, or suddenly losing one's job.
For example, when you are hospitalized in light of a medical emergency which makes you miss your tax deadline, documentation may make a good case for penalty relief, but this is not guaranteed.
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If you believe that any penalties you’re facing may qualify for relief, you can choose to either initiate the steps necessary to have these penalties abated by simply picking up your telephone and calling the IRS yourself, or to ease the burden and fear, you may choose to engage your tax professional for help.
It will take effort and time during business hours to get an IRS representative on the line.
Using the right approach and key phrases can significantly impact the outcome. If you do not know what you are doing, do not make matters worse! Secure qualified help.
The big difference could be the ability to clearly state the request for penalty relief, polite but not too wordy, and the accuracy of the knowledge base requesting the abatement matters too.
What if you’ve already paid the penalties and believe you were unjustly charged?
You could try and ask for refund through filing of the Form 843, or once again, seek out the wisdom of a qualified tax pro for help.Remember, you must follow the guidelines for any refund request that are often no more than three years from the date when you filed your return, or within two years from the date of payment of the penalties.
The penalties imposed by the IRS can be scary, but after knowing what your options may be, and the strategies to engage them with professional assistance, you will have the odds in your favor to save a lot more time and effort.
Whether you're qualified to pay your first time abatement or partner relief, and you can prove reasonable cause as to why you should be eligib;e for an abatement - don't just pay those penalties owed without looking at least once if you really have to pay the ones you owe.
Sometimes a close look and a professional's help will pay off handsomely and you may actually owe nothing!
If you have questions, seek out a tax professional sooner rather than later. Missing a deadline or proceeding on the wrong track could be an easily avoidab;e and costly mistake.
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