It is important that taxpayers understand when IRS penalties and abatements can be applied. IRS penalties are defined under federal law for federal taxes, and those are the issues that we will discuss in this blog. An IRS penalty is a “fine” which can be monetary or in some circumstances, the taking of property. This fine can be a civil or criminal violation of tax law, and the penalty can be small to large, depending upon the type of tax law violation.

Complexity of the Tax Law Code

Tax law code, always complicated, lists about 150 different types of civil penalties. The most common of these are fines applied for not filing tax returns or filing inaccurate tax returns. In addition, fines can be levied as excise taxes on certain types of transactions, or as interest due on unpaid taxes. Assessment of penalties is fairly common, for in the tax year 2012, there were 37.9 million penalties assessed by the IRS. These penalties have a value of $26.9 billion. Most of the penalties, 74%, were assessed for failure-to-file, failure-to-pay, and failure-to-deposit, all avoidable circumstances.

Estimated Tax Payments

If you are self-employed or have income which is not from wages, you are required to make quarterly estimated tax payments. Taxpayers often find it hard to do an accurate estimate of what their income will be annually because of the very nature of being self-employed. You don’t have regular, consistent income, yet must figure out what your taxes are on what you still don’t have. Frequently, people underestimate what they will owe, and therein lies the rub. You can be fined for not paying enough estimated tax. That fine is basically a type of interest on the money that the taxpayer should have paid but failed to do so.

IRS Penalties and Abatements

Interest and penalties can range from very minimal amounts up to 100%. Any employer who withholds income and social security taxes from employees’ pay checks is required to deposit that money to the federal government. If they fail to make that withholding tax payment, the employer can receive a penalty of up to 100% of the amount which should have been paid for each employee. This is a stiff penalty for what should be an automatic tax deposit. The IRS can get very ugly in these types of cases, and there have even been some instances of the IRS seizing employers’ homes for failure to pay.

Tax returns must be filed on time annually, and you should pay all of your taxes at that time. Penalties are established, however, to be more severe on failure-to-file than on failure-to-pay cases. When you file late, that penalty is 5% of the unpaid taxes for each month the tax return has not been filed. The penalty for the failure to pay your taxes is .5% per month, significantly less, but still an avoidable penalty which can hurt your bottom line. Interest (in 2013, it is 3% annually) is also charged on any outstanding tax amount, so you are really getting a double whammy when you fail to pay on time. If you, the taxpayer, have a current installment plan with the IRS where you keep your payments up-to-date, you probably won’t receive a penalty for unpaid taxes. Every case has individual merit, and has to be considered within the context of the taxpayer’s circumstances and compliance history.

Abatements of IRS penalties are not easy to obtain. Sometimes, if you can show you had a good reason for not paying your taxes on time, the IRS will consider the case and sometimes waive the penalty. Recently, the IRS did modify its First Time Abate policy, but to be considered for this, you must be able to show that you have worked willingly with the IRS in the past to stay within the law (compliance). In certain circumstances, this First Time Abatement Waiver can possibly save you up to thousands of dollars in interest and penalties.

Tax code is incredibly complex, and when you are trying to work with the IRS because you have failed to file or pay, you really need a tax code expert to negotiate for you. Jeff Fouts has extensive experience in this area and a proven track record of assisting taxpayers in correcting their tax issues. If you have this problem, do not hesitate, but call him immediately so that he can work with you in getting your tax problems solved.