Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses penalties and interest again, but this time gives tips on how to mitigate and even remove them.
Penalties and interest can quickly get out of hand. The best way to mitigate them is to pay your tax liability. We understand that this may not be an option for everyone. If you can’t pay your tax bill in full, you can set up an installment agreement with the IRS. This will reduce your penalty from a 0.5% accrual per month to 0.25% per month.
Removing Penalties and Interest
If you’re looking to remove your penalties and interest, you have some options. The IRS offers penalty abatement for reasonable cause and first-time abatement. To request penalty relief for reasonable cause, you must prove to the IRS that you tried to file or pay but could not. Examples can include fires, natural disasters, inability to obtain records, death, serious illness, system issues, and some others. It does not include a reliance on a tax profession, lack of ignorance, errors, or lack of funds.
The IRS also offers penalty abatement by administration waiver, more commonly known as first-time abatement. You can request a first time abate if you failed to file, failed to pay, or failed to deposit. To qualify, you must have a good history of tax compliance and did not have any penalties during the prior 3 years, or a penalty was removed for good reason other than a first-time abatement.
While interest cannot be removed from your account, it can be adjusted if penalties are abated. Only the interest related to the abated penalty will be reduced or removed.
Don’t miss next week’s episode where Phil will discuss the Employee Retention Credit. See you next Friday!
If You Need Help Removing Your IRS Penalties, Contact Us Today for a Free Consultation
Owing the IRS doesn’t just stop with your tax balance. If your tax obligations are not met, you could face penalties that can make your debt even more unmanageable. Here are some of the most common IRS penalties and how to avoid (or reduce) them.
Failure to Pay
The Failure to Pay penalty is charged if you do not pay taxes owed by the due date. The 0.5% penalty is applied to any unpaid taxes for every month or partial month the tax is not paid. However, it will not exceed 25% of your unpaid taxes. There are some scenarios in which this penalty can increase or decrease. For example, if the IRS sends a notice with an intent to levy, you have 10 days to pay your tax. If you do not, the Failure to Pay penalty increases to 1% per month or partial month. However, if you set up a payment plan, the penalty is reduced to 0.25% per month or partial month.
Failure to File
If you don’t file by the tax deadline, or the requested extension deadline, you will be charged with a Failure to File penalty. This penalty is 5% of your unpaid tax for every month or partial month that your return is late. Like the Failure to Pay penalty, it caps out at 25% of your balance. The best way to avoid this penalty is to file on time. If you can’t file, or don’t have the money to pay your balance, by the April deadline, you should request an extension. The deadline to file your 2022 tax return is April 18, 2023. Taxpayers should note that for tax returns due after January 1, 2020, and more than 60 days late, there is a minimum penalty of either $435 or 100% of the owed tax, whichever is less.
Underpayment of Estimated Tax
If you don’t withhold enough taxes throughout the year, you need to make quarterly estimated tax payments. If you don’t pay the correct amount of estimated tax, or if you pay late, you may be penalized. Estimated payments are due every April 15th, June 15th, September 15th and January 15th. The penalty can change quarterly but as of Q1 of 2023, individuals are charged 7% on underpaid tax while large corporations are charged 9%. You can avoid this penalty by meeting one of two requirements:
Pay 90% of the tax you owe for the current year in four equal estimated payments, or through paycheck withholding
Pay 100% of last year’s tax bill, before withholding or tax credits. If you have an AGI of more than $150,000, you should pay 110%.
Accuracy-Related Penalty
If you don’t report all your income, or if you claim deductions or credits you don’t qualify for, you could be given an accuracy-related penalty. The two types of this penalty are:
Negligence or Disregard of the Rules of Regulations Penalty: This penalty is common among those who do not follow tax laws or are careless when preparing their return. Examples include not reporting all income or not checking tax deductions that result in a refund that seems too good to be true.
Substantial Understatement of Income Tax Penalty: This penalty is given to those who understate their tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater.
Both of these accuracy-related penalties charge 20% of the portion of underpaid tax that resulted from negligence, disregard, or understated income.
Penalty Relief for Reasonable Cause
In some cases, the IRS may remove or reduce penalties if you acted in good faith with reasonable cause. These situations are determined by the IRS on a case-by-case basis. Some valid reasons for not filing or paying taxes might be because of a natural disaster, inability to obtain records, death, or certain system issues. The IRS may also reduce accuracy-related penalties if you made an effort to correct the issue or seek help about your error. You may qualify for First Time penalty abatement if you have been and are currently compliant with your taxes.
Get Help Avoiding and Reducing IRS Penalties
Remember, the IRS charges interest on penalties and interest will continue to increase your balance until it’s paid in full. Since interest on underpayments begin on the tax due date, it’s important to act as quickly as possible to resolve your tax issue. If you can pay your balance in full, you should do so immediately. If you cannot afford to, you should look into options including payment plans or tax relief. Our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call Optima Tax Relief at 800-536-0734 for a free consultation.
