IRS Penalties and Interest

The obligation to pay taxes becomes even more burdensome when accompanied by penalties and interest. The Internal Revenue Service (IRS) imposes tax penalties for various reasons, such as failure to file tax returns on time, inaccurate tax returns, or failure to pay owed taxes. If you find yourself facing an IRS penalty and interest, it is crucial to understand how the IRS calculates penalties and interest, and the necessary steps to take and to act promptly.

Upon being charged a penalty by the IRS, you will receive a notice through mail. It is particularly important to keep the IRS informed of any address changes, as the notice will be sent to the most recent address on record. Before opening the penalty notice, ensure it is addressed to you or your business. Upon opening the notice, verify the information matches your own. The penalty notice should specify the type of penalty incurred. In case the type of penalty is unclear, refer to the identification number located in the top right corner of the notice. By doing a quick internet search of the identification number, you can gain a clearer understanding of the purpose of the notice.

Receiving a penalty notice may be nerve-wracking, but it is important not to panic. If possible, it is advisable to consult a tax attorney who can provide further clarification on the penalty, explain its implications, and discuss the appropriate course of action. When speaking with an attorney, make sure to provide details such as the penalty amount, the specific type of penalty, and the pay-by date mentioned in the notice.

If you are unable to consult with an attorney, contacting the IRS directly is the next step. Although it may be intimidating to communicate with the agency charging the penalty, it is crucial to inform the IRS about receiving the notice. Responding to the notice promptly will help minimize additional interest or penalty charges and preserve your right to appeal if you disagree with the penalty.

The IRS imposes different penalty rates depending on the type of penalty. For instance, the Failure to Pay penalty is 0.5% of the unpaid taxes per month or part of a month, while the Failure to File penalty can reach up to 5% per month. Fortunately, the IRS does offer some relief. The penalty amount cannot exceed 25% of your unpaid taxes. By negotiating with the IRS and establishing a payment plan, you can reduce your penalty rate to as low as 0.25% per month.

The IRS also charges interest on unpaid liabilities, including the tax, penalties, additions to tax, or interest itself. The notice will indicate a “pay by” date. If you agree with the penalty amount and wish to quickly settle it, making the payment by the specified date will prevent the accrual of interest. The IRS establishes a new quarterly interest rate each year. Currently, the interest rate for individuals with tax underpayment is 7%, but this figure is subject to annual change. According to 26 USC § 6622, interest is compounded daily.

If you disagree with the penalty and seek to dispute it, hiring a tax attorney is the next recommended step. A tax attorney can guide you through the complexities of your case and negotiate with the IRS regarding the penalty and interest charges. Several avenues for penalty relief exist, such as First-Time Penalty Abatement and Administrative Waiver, Reasonable Cause relief, or a Statutory Relief Exception. The type of relief you qualify for depends on the specific penalty and your current penalty status. It is important to note the IRS cannot reduce or eliminate interest on a penalty until the penalty itself is reduced or eliminated.

After receiving an IRS penalty, it is important to avoid incurring additional penalties in the future. To achieve this, several steps can be taken. First, if your taxes are complex or if you lack confidence in filing them on your own, seek assistance from a competent Certified Public Accountant (CPA). CPAs can provide valuable guidance in ensuring accurate tax filings, identifying eligible deductions, and addressing any tax concerns. Second, ensure that you file your taxes on time each year. If necessary, you can request an extension to file, as the IRS prefers granting extensions over taxpayers failing to file altogether. Third, ensure that you pay the correct amount of taxes and confirm the payment is successfully processed. While this may seem obvious, many individuals either make partial payments or neglect to verify the payment, leading to complications later.

RJS LAW is home to qualified and experienced tax, tax planning, estate and trust, and international tax attorneys who are available for a complimentary consultation. Please feel free to contact RJS LAW online or at (619) 595-1655.

Written by Marley Smith-Peters