IRS Penalties

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Tax Problems

IRS penalties can significantly increase what you owe beyond the underlying tax. The failure to file penalty alone can reach 25% of unpaid taxes, and accuracy-related penalties add another 20%. But many taxpayers don’t realize that not all penalties are permanent—the IRS offers several avenues for penalty abatement.

Common IRS Penalties

The failure to file penalty applies when you don’t file your return by the due date—5% of unpaid tax per month, up to 25%. If your return is more than 60 days late, the minimum penalty is either $510 or 100% of unpaid tax, whichever is smaller. This penalty is particularly harsh, which is why filing on time (or requesting an extension) is crucial even if you can’t pay.

The failure to pay penalty accrues at 0.5% of unpaid taxes per month, capped at 25%. This rate increases to 1% per month after receiving a notice of intent to levy.

Accuracy-related penalties of 20% apply to negligence, disregard of rules, or substantial understatement of tax. An understatement is ‘substantial’ if it exceeds either $5,000 or 10% of the required tax.

First-Time Penalty Abatement

First-time abatement is an administrative waiver for taxpayers with clean compliance history. To qualify, you must have no penalties in the previous three tax years, have filed all required returns, and be current on payments or on an approved payment plan. This applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties.

Reasonable Cause Abatement

When circumstances beyond your control prevented compliance, you can request reasonable cause abatement. Qualifying situations include natural disasters, serious illness or death, unavoidable absence, inability to obtain necessary records, and reliance on erroneous professional advice. You must demonstrate that you exercised ‘ordinary business care and prudence’ but still could not comply.
If you have been assessed IRS penalties and want to explore abatement options, contact Boss Tax Law today.