Employment and Criminal Lawyer

What are the most common IRS penalties?

Most penalties are not abated by the IRS. Why? It could be because people don’t know how to ask for penalty relief or that it may seem too difficult. Here are some reasons why it's worth it.

To encourage compliance, the IRS uses penalties a lot. The IRS assesses millions of penalties each year totaling billions of dollars. The IRS offers several options for those who are eligible to have penalties removed or abated.

For not filing and not paying taxes, the IRS has the most severe penalties

The Internal Revenue Code contains almost 150 penalties. However, there are a few more common penalties that make up 74%. These are the most popular penalties:

• Penalty for failure to pay penalty - 56% on all penalties if you fail to pay taxes on time
• Failure to File Penalty - 14% of all penalties imposed if you fail to file a return in time
• Failure to Deposit Penalty - 4% of all penalties imposed on businesses that fail to pay their employment taxes on time or incorrectly

Late-filing penalties for S corporations and partnerships are a common nuisance penalty. Taxpayers often contest the estimated tax penalty by offering an exception when filing their tax returns.

What Is Tax Forgiveness?

For the most common penalty, you can ask for penalty abatement using these four reasons:

1. Statutory exception: Proving a specific, authoritative exclusion to the penalty

Statutory exemptions are rare and can be explained to the IRS easily, usually at tax filing. Examples of such exceptions are combat zone relief and disaster relief.

2. IRS error: Documenting the fact that the error resulted from IRS advice

This penalty relief argument is rarely used and is often unsuccessful. The IRS does not routinely provide tax advice in writing. You must document any erroneous IRS advice that you have relied upon. Although the Internal Revenue Manual says that penalty relief is available for errors in oral advice, it is very rare.

3. Reasonable cause is a reason you can't comply with the request based on your facts.

People often argue that they were guided incorrectly by their tax software or tax professionals. This argument is reasonable.

You must show that you used ordinary business care and prudence but were unable to comply to present a reasonable reason for late payment and filing. Also, you must show that your non-compliance wasn't due to willful neglect.

Most people aren't successful in presenting reasonable cause arguments to the IRS, particularly in court. The majority of penalty abatement decisions never reach court. The IRS makes most administrative decisions.

You must ensure that the IRS takes into account all facts and circumstances to be successful with reasonable cause determinations. You should appeal any penalty abatement rejection letter that does not address all of your facts and arguments.

4. Administrative waiver: Taking advantage of a provision that facilitates tax administration

Under certain conditions, the IRS may grant administrative relief from a penalty. First-time penalty abatement (FTA) is the most common administrative waiver.

FTA can be used for failure to file, failure to pay, or failure to deposit penalties in one tax period if you have a clean compliance record for the last three years. FTA can be used to abate penalties on Form 1040 and Form 1120 as well as payroll and pass-through entities.

FTA is the easiest option for penalty relief. It is possible to request FTA by calling the number listed on your IRS notice. If applicable, your tax professional can also call the designated tax pro hotline and compliance unit to request FTA for any penal amount.

Dear IRS, please no penalties! The IRS is asking for your forgiveness. The defense that a tax position was founded on reasonable cause and that the taxpayer acted in good faith is one of the most important but often misunderstood. These words may seem simple and easy to understand, but they are terms that are art. The IRS might not agree with a taxpayer who believes that he or she followed them as a matter of common sense. This article does not address the IRS's first-time penalty abatement program.

The amount of the penalty is one way that the IRS will determine how to evaluate defense. Some penalty defenses, in addition to reasonable cause, may also include other concepts such as the absence of willful neglect. Does that not prove a negative? It is.

What are some of the tax relief programs available?

This should not come as a surprise. Of course, the IRS does. The IRS does not. Taxpayers bear the burden of supporting their reasonable cause. All taxpayers must use ordinary business care and prudence when reporting their correct tax liability. Remember that all tax returns must be signed under penalty of perjury.

The IRS applies a facts-and-circumstances test on a case-by-case basis to determine whether a taxpayer meets the reasonable cause and good-faith exception. These can result in inconsistent or subjective results. Because the Sec. The Sec. 6662 accuracy-related sanctions, which are typically 20% of the amount at risk

Penalties for civil fraud under Sec. 6663. What is the civil fraud penalty? It is a staggering 75%. If a tax deduction is not correct and amounts to $10,000, then add $7,500 if the IRS claims it was a fraud. Although fraud penalties aren't often brought to light, it is not unreasonable to assume that they can be severe. This makes it possible for taxpayers to avoid them, even though they may end up having to pay all of the tax and interest.

There's more. The IRS may also impose other penalties, including penalties for failing to file a tax return and failing to pay under Sec. 6651; (2) for filing an incorrect claim for refund or credit under Sec. 6676; (3) failure to file Form 1099 and other information reporting returns as required by Sec. 6721; and (4) the understatement by a tax return preparer of a taxpayer's responsibility under Sec. 6694.

The Code is full of penalties. It is possible to cut through all the details by saying that taxpayers always want to claim that they acted reasonably and with cause when claiming every item on their tax return in good faith. But when does a taxpayer not feel the need to argue reasonable cause?

You could have multiple situations. An underpayment of tax due to transactions that lack economic substance as defined under Sec. 6662(b)(6). The same applies to penalties for gross-valuation excess from claiming charitable contribution deductions for properties. However, all is not lost. There can still be penalty relief, but the rules and procedures are more complicated. These two penalties can be applied to highly aggressive transactions, but they do not apply in most cases or for most people.

Reporting on tax returns is key

The IRS states that the most important factor in determining whether taxpayers have reasonable cause and acted in good faith is the taxpayer's efforts to report their correct tax liability. While a taxpayer might be trying to accurately report the correct amount, it is not always possible. But, reasonable cause is not dependent on the legal authority supporting the position on the return. This is in contrast to the taxpayer defense of a "reasonable base".

It depends on the actions of the taxpayer. Let's say, for example, that the taxpayer reported the incorrect amount on a Form 1099 but didn’t know that the Form 1099 was inaccurate. The audit revealed that Form 1099 reported less information than the taxpayer received. This could happen to anyone. People rely on Form1099 data a lot. Therefore, the reasonable cause could apply if the taxpayer reports only the amount that it believes is correct.

What if the taxpayer was paid $300,000. But the Form 1099 stated $300? If the Form 1099 incorrectly stated $285,000., it might be easier to argue that it was reasonable for taxpayers to report that amount. Even with a large error, a taxpayer's behavior and actions may still be acceptable.

What about an error in the computation or transposition of the return? It is possible to make a common error, provided you have reasonable cause and made a good faith effort. It's easy to misinterpret numbers or make other mistakes. It is unlikely that the IRS will be able to understand a return with more than one of these errors.

A few mistakes can be explained even if they are obvious in the end. The IRS also considers the taxpayer's knowledge, experience, education, and trust in tax advisors. The facts and circumstances are important. It is also relevant to consider the taxpayer's education, experience, and knowledge regarding tax laws. Many taxpayers rely on the advice of a tax professional to avoid penalties.

The IRS states that you must rely on a tax professional objectively and reasonably. Taxpayers are required to provide all information necessary for their tax advisor to assess the tax matter. It is wrong to cherry-pick the information that the taxpayer gives the tax adviser to get the right answer.

A tax advisor must also be knowledgeable in the subject matter. According to the IRS, the adviser should have expertise and knowledge in tax matters. It is possible that a taxpayer with a complicated corporate tax problem might not be able to trust a low-income individual tax adviser, regardless of how diligently he follows his advice.

According to the IRS, auditors should decide if the taxpayer acted reasonably and in good faith. This will be done based on each case and all facts. The taxpayer must have exercised reasonable care under the circumstances. The penalty can also affect the meaning of reasonable cause.

Some penalties also require proof that the taxpayer acted in good faith or that the taxpayer failed to comply due to willful neglect. Each penalty provision may not have the same standard for penalty relief. Sec. Sec.

Sec. Sec. The Sec. Finally, the Sec. It is important to examine the penalty you are trying to avoid. Taxpayers are eager to prove that their facts and conduct have met all requirements.

In writing

Do taxpayers have to present their cases orally? Although it is not common, taxpayers may be able to start this way in certain cases. It is best to put it in writing, as with everything dealing with the IRS. Many times, the tax regulations require the taxpayer to request a waiver of the penalty in writing. Secs. Secs.

All facts and circumstances will determine whether the elements of reasonable cause, good faith, or willful neglect are present. When the taxpayer used ordinary business care and prudence, a reasonable cause can be established. Ordinary business care or prudence can be defined as exercising the same level of care as a reasonably prudent person, but not being able to comply with the law.

Key elements

In determining reasonable cause, the taxpayer's efforts to accurately report their tax liability are the most important factors. The IRS instructs agents to consider all relevant factors when assessing taxpayers' efforts, such as the nature of the tax, complexity of the issue, the competence of tax advisers, and so forth. The IRS also considers the taxpayer's education, experience, and reliance upon the tax adviser's advice.

The IRS instructs agents to evaluate all facts and circumstances to determine whether taxpayers exercised ordinary business care or prudence. They also review all information, including the taxpayer's reason, compliance record, length of time, and other circumstances beyond their control. But don't think that this only applies to the one tax year.

The IRS advises agents to also look at the three tax years before them. They examine payment patterns and compliance histories. It is possible that a taxpayer who is repeatedly assessed the same penalty does not exercise ordinary business care. The IRS may have previously assessed the same penalty and forgone it. This is a sign that the taxpayer may not be exercising normal business care when the same thing happens again.

The IRS will, however, consider this if it is the first instance of noncompliance. The IRS must consider all facts and circumstances. This includes the time period between the tax problem and its resolution. The penalty should be correlated with the date and event that caused the error.

Even the IRS will admit that there are circumstances and mistakes beyond taxpayers' control. The IRS asks if the taxpayer could have anticipated or foreseen the problem.

What about getting tax advice from IRS? Is that always reasonable, or? Not necessarily. This is especially true for oral advice. Consider whether the advice was given by the IRS in writing or verbally. Oral advice is usually not worth the paper it isn't printed on. The IRS will evaluate the information and determine if it was written advice that was given to respond to a specific request. The IRS wants to know whether the individual relied on the IRS advice.

Complex tax laws can lead to taxpayers making mistakes. Some things are easy to understand, while others are more complicated. The IRS states that a taxpayer generally does not have reasonable cause to pay a penalty for late filing of a return or payment of tax obligations. The taxpayers claimed that they believed tax returns were due May 15, not April 15. Even though a tax professional said that it is unlikely to save them from penalty.

They claimed that their accountant had filed their tax return. The accountant then forgot to file it. According to the IRS, everyone is responsible for timely filing taxes as well as for paying them. Even if taxpayers have recourse to accountants, bookkeepers, or attorneys, they cannot delegate the responsibility for timely filing tax returns and timely paying their tax obligations. However, they might be forgiven for things such as the inability to access records or the fact that they are not aware of a law change.

Taxpayers may be eligible for penalty relief if they are not familiar with the law. Relevant factors include education and whether the taxpayer is subject to the tax previously. What about forgetfulness as a basis of reasonable cause? According to the IRS, forgetfulness is a lack of reasonable cause.

The IRS Fresh Start program includes the Offer in Compromise program. This program is designed to assist taxpayers who have significant tax liabilities and cannot pay their full debts. OIC can be a useful program for those with significant tax liabilities and who want to get back in compliance.

Most cases will result in an OIC by the IRS or the State of Maryland. This is to ensure that the figure they can recover for the taxpayer over some time is not less than their actual liability.

There are specific eligibility requirements, but generally, people who are not in bankruptcy proceedings and have current tax filings may be eligible for the program. You may not be eligible if you are enrolled in an installment or payment program. The program is also available to businesses, provided that their tax filings are current, and they have paid estimated payments. They must also submit required federal tax deposits.

Continue reading to find out how the IRS calculates OIC repayment figures and how you can save the most.

How much will the IRS settle tax debt for?

Every offer in compromise has two components: 1) The amount that the IRS believes you can pay in monthly installments and 2) Your net realizable equity (NRE).

The IRS uses the "asset equity formula" to calculate your NRE. This formula allows the IRS to take into account the fair market value for each asset and subtract the following:

Quick sale value: To determine the price you would receive if you could quickly sell your assets without having to look at many offers and negotiate the best deal, the IRS reduces their assets' value by usually 20%.

Bank Loans and Mortgages: If you have any liens on your assets or mortgages, the IRS will deduct the value from the quick sale price.

Property Exclusions the IRS may exclude an asset's value for public policy reasons. The IRS won't punish people with income-producing assets (such as a snowplow or video production material) or force them to move into a smaller apartment to pay their tax debt.

Calculating the equity in your assets

Each taxpayer is affected by the asset-equity formula in a variety of ways depending on their circumstances. Here are some examples.

Related: How to get the IRS to accept your offer in compromise

Home Equity Offer in Compromise: The IRS will reduce your fair market value by 20% (multiplying by.8) to $160,000 to determine the fast sale value.

Let's suppose you owe $120,000 in the mortgage. That would make your OIC $40,000 (or 160,000 to $120,000). The IRS cannot accept any settlement offer if there is no equity in your home. This element may also be satisfied if you can show the IRS two rejection letters of different banks from which you tried to withdraw funds to pay your tax debt.

Vehicle Equity to Offer in Compromise: The same formula applies for any vehicle you own, but the IRS requires an additional $3,450 exclusion for all cars and planes.

If you have a $20,000 car but owe $10,000, your net equity is $2,550 ($20,000 x 0.8 - $10,000 + $3,450 = $2,000. You cannot offer anything to the IRS if the vehicle has no equity.

Personal Possession Equity to Offer in Compromise: To determine the quick selling value of each item, subtract 20% from the total value of your possessions. The IRS allows an additional $6,250 per individual exclusion from the quick sale value of these possessions.

If your possessions total $40,000, they will automatically be reduced to a quick sale price of $32,000 ($40,000 x 8.8). Let's suppose that two people live in the house and jointly own the property. This would leave $12,500 ($6,250x2) in total exclusions. The net equity towards an offer in compromise would be $19,500 ($40,000x8 - $12,500 = $19,000.

Offer in Compromise - Cash Equity: The IRS will take into account all cash that you have on your body and in your bank accounts as assets when determining an offer to compromise. The IRS will examine your bank statements for the last three months to determine the average daily balance. For self-employed persons, it may take six months. To determine the total value of your cash assets, they will add any cash that you may have in the house or cash on hand.

To account for living expenses, the IRS allows an exclusion of $1,000. Additional exclusions may be permitted if living expenses are higher than this amount. This is based on IRS guidelines for living expenses.

How to Apply for the IRS Tax Fresh Start Program?

Individuals who owe large amounts of unpaid taxes but are unable to pay can turn to an offer of compromise.

OIC is an agreement between IRS and taxpayers to settle taxpayers’ tax liabilities for less than the amount owed. Before approving an OIC, the IRS examines the taxpayer's income and assets and records every detail of their financial situation. Many IRS applications are rejected because of negligence by the taxpayer. Many taxpayers don't know how to obtain an offer in compromise which can increase the likelihood of rejection. These are the four guidelines that will help you improve your chances of getting approved for your OIC application.

1. Don't accumulate more tax debt

The IRS usually takes 6-12 months to process an OIC request. The chances of getting approved automatically drop if a person continues to accumulate debt. It is not a good idea to put off tax payments while the collection process proceeds. Instead of waiting for their OIC determination, the applicant should pay quarterly estimated taxes.

2. Appeal an unfavorable ruling

Many applicants don’t know how to appeal an offer denial. An appeal can be financially more beneficial even if the IRS has made you a favorable offer. However, it is important to know how to do this. About a third of OICs are accepted by the IRS. The primary reason this happens is that the taxpayer doesn't know enough about the appeal process.

3. Do not withdraw your OIC application

The offer in compromise examiner reviews the information provided by the applicant and sets a date to meet in the office. Sometimes, the examiner may suggest that the applicant chooses an IRS collection alternative. an installment agreement. You can convince the examiner not to accept the alternative and, in the worst case, appeal.

4. Do not submit "junk" offers

To get OIC approval, the applicant must provide supporting documentation for each figure entered on the form. Avoid mentioning junk offers (e.g., a friend lending your money to pay taxes), as they lack documentation and support logic, which can increase your chances of rejection. The mandatory 20% deposit that you must pay with your request will be lost. You will be required to pay an additional 20 percent if you submit a legitimate offer.

Last words

The IRS makes only decisions that are best for the government. To win the game, you must be familiar with the rules. Expert legal advice is the best way to minimize or eliminate your chances of being rejected. Law Offices Of Nick Nemeth, PLLC has a team of dedicated professionals who will take care of all your IRS tax issues. Nick Nemeth is a professional with years of experience helping people and businesses solve major tax problems.

You can offer a lower amount to pay your final tax liability. OIC candidates are individuals or businesses that do not have the income, assets, or means to pay their tax liabilities now or in the future.

The Franchise Tax Board (FTB) generally approves an OIC when it is the maximum amount we can expect to collect in a reasonable time.

While each case is evaluated based on its unique facts and circumstances, the following factors are important to our evaluation:

• Capacity to pay.
• Equity in assets
• Future and present income
• Future and present expenses
• The age and health of the taxpayer.
• Potential for new circumstances
• What are the state's best interests?

Apply process

Complete the application form and submit the required documentation to apply for an OIC. To see a list of items required, visit ftb.ca.gov/forms. Search for 4905

• Use FTB 4905 PIT for Personal Income Tax. Offer in Compromise to Individuals.
• Use FTB 4905 BE, Booklet for Business Entities

Only OIC applications will be processed if they are:

• You have filed all required tax returns. Now you can agree on the amount that you owe. You can note any filing requirements that you don't have on your application.
• Completed the Offer in Compromise Application and submitted all supporting documentation.
• Authorized FTB to access your consumer credit report, investigate and verify the information that you have provided in your application.

All applicants must

To ensure that you cover all areas, complete the checklist included in the application.

• Completing all pages of the application is essential. You can also write "not applicable" in appropriate areas.
• Please complete the justification and the source of the funds. These sections cannot be left out.
• Check that the application has been signed and dated.
• Be sure to include all required copies of bank statements, payslips, and profit/loss worksheets.
• If you have completed or submitted an offer to the IRS, including the application and acceptance letters.
• All information and assets should be included. We will deny an offer if we find any assets that were not included in the evaluation.

Companies

• Before applying, ensure that all returns required are filed. All returns for the current year must be included by business entities. This could include a partial-year return and the marking of the "final return” box on the last return.
• You should also provide proof that all bank accounts were closed.
• Verify that all assets are liquidated.

Individual income tax

• For amounts claimed, including three months of billing statements
• Include a current rental agreement.
• Attach copies of bank statements and payslips. Provide profit and loss worksheets if you are self-employed.
• You must show documentation if you can justify the offer because of a medical condition.

How is IRS interest calculated?

The interest rate is simpler to calculate than the penalties and interest. The IRS interest rates are determined using the Federal short-term rate plus 33% for most people.

As of January 2022, the federal short-term rate is.44%. The federal short-term is based on a one-month average market yield from US marketable obligations with maturities less than three years.

The Internal Revenue Service has announced that interest rates will not change for the first quarter of 2022. These rates are:

• Overpayments: 3% (two (2) percent for corporations)
• 0.5% on the number of corporate overpayments exceeding $10,000
• 3% for underpayments
• 5% for large corporate underpayments

Remember that interest rates are expected to increase in 2022 so these numbers could and will change. The interest rate is calculated daily. If you delay paying taxes, you will owe more.

If you owe $10,000 to the IRS and are 90 days late, your total interest costs would be around $75.

Why does the IRS charge penalties?

The IRS is not kind to those who don't have enough money to pay their tax liability. Your penalty amount will depend on what type of penalty you have and how long it takes to repay it. According to the IRS, penalties are intended to encourage voluntary compliance.

How can you tell if the IRS owes you a penalty?

The IRS will send you a notice by mail if they charge you a penalty. You will receive a notice or letter detailing the penalty, the reason for the charge, and the next steps.

Every notice will contain an identification number. In some cases, the penalty may be waived if you can resolve your problem.

How Can I Get My Taxes Forgiven?

Interest is charged by the IRS on penalties. The penalty type and amount will determine the date at which interest is charged. The amount you owe will increase gradually until it is fully paid off.

Types of IRS Penalties

There are many types of IRS penalties that you could be subject to. You will be able to navigate the IRS penalties better if you are faced with them, or even avoid them entirely.

There are many reasons why the IRS may charge penalties, but the most common is if you don’t:

• You must file your tax return by the due date
• All taxes owed must be paid on time and promptly
• Make sure you have a complete return
• Give accurate information

What is tax relief?

If you fail to file your tax return within the deadline, the Failure To File Penalty will apply. The penalty is a percentage for taxes not paid on time.

Based on the time you filed your tax return late and the amount of unpaid taxes as of the original due date, the penalty will be calculated.

The total tax that remains unpaid is the tax you are required to show on your return, minus any amounts paid through withholding or estimated tax payments and allowed refundable credit.

The Failure to File Penalty is calculated as follows:

• For each month, or portion of a month, that your tax return is late, you will be charged 5%. The penalty is not to exceed 25% of total unpaid taxes.
• A Failure to pay penalty can also be accessed. This reduces the Failure To Pay Penalty by the amount for the month. For a total penalty of 5% per month or part thereof, that you have late returned,
• After five months of nonpayment, the Failure to Pay Penalty will be maximum. However, the Failure to Pay Penalty continues until the tax has been paid up to 25% of the amount due date.
• The minimum penalty for failure to file a return more than 60 days late is $435, or 100% of the tax due on the return.

How much will the IRS settle tax debt for?

Taxpayers who fail to pay the tax due by the due date, or approve the extended due date, are subject to the Failure to Pay Penalty. The accessed penalty represents a percentage of taxes not paid.

Based on the amount of unpaid taxes, the IRS calculates the Failure To Pay Penalty. Unpaid tax refers to the amount of tax that must be shown on a return, minus any estimated tax payments or withholding.

The 25% Failure to Pay Penalty is not more than 25% of the total amount of unpaid tax. The Failure to Pay Penalty can be calculated in the following manner:

• The Failure to Pay Penalty amounts to 0.5% of unpaid taxes per month or portion of a month that the tax balance remains unpaid. The penalty will not exceed 25% of unpaid taxes.
• The Failure to File Penalty is reduced by the amount that the Failure To Pay Penalty was applied to the month. Instead of a 5% Failure To File Penalty, the IRS will apply a 4.5% Failure To File Penalty as well as a 0.5% Failure Not to Pay Penalty.
• If your tax return was filed on time and you have an approved payment program, the Failure to Pay Penalty is reduced by 0.25% per calendar month (or partial) if you follow your approved payment plan.
• You can be penalized for failing to pay your taxes within 10 days of receiving a notice from the IRS with an intent to levy.
• Even if you have paid your taxes in full by the end of the month, the IRS will still charge full monthly fees.

How to Apply for the IRS Tax Fresh Start Program?

If you fail to pay the tax due on your return, an Accuracy-Related Penalty is applied. Underpayments may occur when you fail to report all your income or claim deductions and credits that you are not eligible for.

Two types of Accuracy Related Penalties are applied by the IRS to individuals.

1. Negligence in disregard of the Rules or Regulations
2. Substantial Understatement in Income Tax

If the IRS finds that you didn't make a reasonable effort to comply with tax laws while preparing your tax returns, they will apply negligence. You disregard the tax regulations or rules because you act carelessly, recklessly, or inadvertently.

Neglect is an example of this:

• You don't keep records that prove you are eligible for the credit or deductions claimed
• Income not included on your tax return if it was reported in an information return, such as income reported on Form 1099
• It is important to verify the accuracy of any credit or deduction that appears exaggerated.

If you underestimate your tax liability by 10% or more of what is required on your tax return, or $5,000 respectively, it will be considered a substantial understatement of tax.

IRS Underpayment of the Estimated Tax Penalty

If you fail to pay estimated tax on your income or pay it too late, the Underpayment of the Estimated Income Tax Penalty may apply. Even if you are owed a refund, the penalty could apply.

The IRS calculates the penalty amount based on the tax you have paid on your original return and any subsequent returns that were filed before the due date. The total tax you owe less your refundable credits is the tax shown on your return.

The following factors are used by the IRS to calculate the penalty:

• The underpayment amounts
• The time when the underpayment was due.
• The quarterly published interest rate for underpayments by the IRS

IRS Failure to Deposit Penalty

Employers who fail to make the required deposits in time and in the correct amount or the proper manner will be subject to the Failure to Deposit Penalty.

Federal income tax, Social Security, Medicare, and Federal Unemployment taxes are all taxes that employers pay. A penalty is a percentage tax not paid on time, in the correct amount, or the correct manner.

The IRS calculates the amount due to failure to deposit penalty based on how many calendar days you have been late with your deposit, beginning at the due date.

The IRS does not add 10% to the earlier 2% or 5% late penalties if your deposit is more than 15 days late. Your new total penalty would instead be 10%

IRS Information Return Penalty

If you fail to file or provide payee statements in time, an information return penalty may be applied. For each incorrectly filed information return and for each failed payee statement, the IRS will impose penalties.

For small businesses and large companies, the maximum penalties can be different. Intentional disregard is not punishable by a maximum penalty.

Is the IRS ever willing to forgive penalties?

If you act in good faith and can provide reasonable explanations for your failure to pay taxes, the IRS may reduce or remove some penalties. The penalty must be removed or reduced before the IRS can remove or reduce interest.

After analyzing all facts and circumstances, the IRS will determine if there is reasonable cause. The IRS says they will consider any reason that establishes you used all reasonable business care and prudence to comply with your Federal tax obligations but were unable to do so.

Any of these reasons will be considered valid by the IRS as valid reasons to not file a tax return.

• Fire, accident, natural disaster, or other disturbances
• Inability to obtain records
• Death, serious illness, incapacitation, or unavoidable absence from the taxpayer or a member his immediate family
• Another reason is that you tried all normal business care and prudence to comply with your Federal tax obligations, but were unable to.
• Not a reason for not filing or paying on time. The reasons for the absence of funds could be considered reasonable causes for the failure to pay penalty.

The IRS will ask for facts to prove reasonable cause.

• What happened?
• What circumstances and facts prevented you from paying your tax or filing your return during the time you didn't file your taxes?
• What factors and circumstances have impacted your ability to file, pay and/or submit your taxes?
• What actions were you able to take to file your taxes and/or pay them after the facts and circumstances had changed?
• If the corporation, estate, or trust is involved, was the only person able to execute the return or deposit the payment or give instructions?

Common documents that the IRS may request to establish reasonable cause

• Hospital records, court records, or a letter from your physician to prove illness or incapacitation with specific start and end dates.
• Documentation of natural catastrophes and other events that prevented compliance

How do you dispute an IRS Penalty?

You have the right to contest the penalty if you disagree with the amount that the IRS has determined you owe. You can call the IRS to dispute the penalty or send a letter explaining why the IRS should reconsider. Send your letter and any supporting documents along with your notice to the IRS address.

These details should be included in your letter, or on hand if possible.

• The IRS notice or letter
• You want them to reconsider the penalty
• An explanation explaining why you believe the penalty should be lifted is required for each penalty

What is the IRS First Time Penalty Abatement?

If certain criteria are met, the first-time penalty waiver (FTA waiver) is an administrative waiver that may be granted by the IRS to taxpayers to exempt them from failing to file, failing to pay, or failing to deposit penalties.

The procedure's purpose is to reward taxpayers who have a clean record of compliance and to allow everyone to make one honest mistake.

FTA does not apply to any other penalties, such as the accuracy-related penalty and underpayment of the estimated tax penalty.

You must meet these criteria to be eligible for penalty abatement.

• Compliance filing: You must have filed all required returns (or filed an extension). There cannot be any outstanding requests for returns from the IRS.
• Compliance with payment: All tax payments must be paid or arranged to be paid (can be made in installments if they are current).
• Clear penalty history: There must be no previous penalties, except for an estimated tax penalty, in the three preceding years.

What happens if I miss a year of filing taxes?

Many people wait years to file their tax returns. They become anxious about the consequences if they don't file their tax returns for the year.

It is best to act now and not let it happen again. Neglecting it will only make things worse, no matter how dire your situation.

These are the facts to keep in mind when considering what is at stake if you decide not to file.

It's illegal:
Every year you are subject to a filing obligation, the law will require you to file. Failure to file your return can result in civil or even criminal penalties.

You will be punished:
Late filing penalties are 5% of the tax due per month for the first five calendar months. This penalty can be up to 25% of your tax bill. The IRS will continue to charge interest until the balance is paid. Late payment penalties can add up quickly, so it is always better to file even if your taxes are not due.

You can lose your refund:
You may lose your refund if you fail to file the return within three years. You must return the refund within three years of the due date to receive your refund.

You don't have to worry about late filing penalties if you miss one or more years of filing taxes. A tax professional can assess your situation and help you make a plan to get you back on track as soon as possible.

What is a Penalty Abatement?

A penalty abatement, at its most basic, is when the IRS eliminates penalties that were assessed against you. The IRS can assess penalties for many reasons. However, the most common are failure to pay, late filing, and accuracy. Even if they have been granted a penalty abatement, taxpayers are still responsible for any unpaid taxes.

Taxpayers are not automatically issued abatements by the IRS. It is necessary to request one. The IRS is not likely to reduce penalties. Recent statistics show that about 11% of tax penalty penalties are reduced. The IRS does not consider fairness or the ability of the taxpayer to pay the tax, penalty, interest, or tax due.

The IRS charges interest for any penalties it assesses. Getting your penalty reduced will also eliminate interest.

What are the requirements to be eligible for a Penalty Abatement?

The IRS states that you could be eligible for penalty relief if your compliance with tax laws is not possible due to circumstances beyond your control. The IRS states that the majority of penalties abatement grants fall into four categories.

• Don't rely on incorrect IRS advice
• There are statutory and regulatory exceptions to the tax law penalty
• Administrative waiver to assist tax administration, including hardship failure to pay penalty relief and penalty abatement for the first time
• Reasonable cause

Taxpayers who have not had any previous compliance problems can get a first-time penalty abatement.

These qualifications are also required:

• There were no penalties for any tax years before the year in which you received the penalty, or weren't required to file a tax return.
• You have filed all required returns.
• You have either paid or arranged for the payment of tax.

Reasonable Causes for Penalty Reduction

The IRS will grant a reasonable cause penalty abatement to most taxpayers who don't file for first-time penalty abatement. When deciding whether you are eligible to receive a reasonable cause reduction, the IRS will first consider whether you acted in good faith. The IRS will also consider whether you tried to accurately report your tax liability, but failed due to unforeseeable circumstances beyond its control.

Reasonable Cause Examples

The IRS accepts the following reasonable causes:

• Relying on the advice of a tax professional is reasonable
• Ignorance of tax laws
• Medical illness
• Financial hardships that can be severe
• Death in the family
• Natural disasters
• Destruction of records
• Incarceration

Keep in mind that the IRS will often require documentation to support your claim for a reasonable reason for penalty abatement.

How do I file a Penalty Abatement request?

You can call the IRS to request penalty abatement for the first time if you are interested in pursuing it. You may need to contact the local IRS office if your case is being handled by them. The IRS will mail a letter stating that the penalties have been removed if your request for a phone abatement is granted.

Other types of IRS penalty abatement such as reasonable cause abatements are not often granted by the IRS over the telephone. Therefore, it is important to request them in writing. You can also use Form 843 to request a penalty reduction for reasonable cause or an IRS error.

Are you denied a Penalty Abatement Here's what to do

Most penalty abatement requests are rejected by the IRS so don't be surprised if it is denied. If you feel that the IRS rejected your request in error, you can still appeal or have a hearing. An IRS appeals officer can conduct hearings and conferences that will assess all the facts and circumstances surrounding the abatement request.

You have 30 days to appeal the rejection letter issued by the IRS in most cases.

For assistance in filing a penalty abatement, please contact us

The Hillhurst Tax Group has the expertise to help you if you feel the IRS is forcing your to pay unfair penalties because of circumstances beyond your control. Our knowledgeable staff will help you determine if you are eligible for an IRS penalty reduction and can represent you throughout the entire process to protect your rights.

It is safe to assume that most taxpayers dislike paying taxes and hate paying IRS penalties, especially when the penalties seem unjust. While penalties can also seem arbitrary to taxpayers, IRS policy is clear and deliberate on their reason for existence: to deter taxpayer noncompliance, not to generate revenue.

The IRS established the first-time penalty abatement administrative waive (FTA) 12 years ago. This allows generally compliant taxpayers, both individuals, and businesses, to request the abatement or removal of penalties the IRS has assessed against them. The IRS offers a one-time penalty waiver (FTA) to taxpayers who are typically compliant. This can help taxpayers save hundreds, sometimes thousands, of dollars.

According to a 2012 Treasury Inspector General for Tax Administration report (TIGTA), few taxpayers are eligible for FTA. The problem is that both tax professionals and taxpayers don't know FTA exists. Additionally, IRS representatives frequently incorrectly deny an FTA by using the flawed automated decision tool the IRS to make penalty determinations.

FTA is a secret to tax professionals and taxpayers. They may not know how it works, what to do to request it, or even if it exists. This article explains the IRS FTA waiver, and how clients can remove certain penalties by using it.

Penalties and Abatement

The IRS assessed 37.9 Million penalties to taxpayers in fiscal 2012. This is 74% of all penalties assessed for 2012. Most penalties are assessed automatically by the IRS, regardless of the taxpayer's financial situation.

Methods to Request Penalty Relief

Taxpayers have three options to request relief from penalties for failure-to-file, failure-to-pay, or failure-to deposit penalties depending on their circumstances:

• The taxpayer can request that the IRS not automatically impose a penalty before the IRS assesses it.
• The IRS can assess a penalty and the taxpayer can request abatement. This is usually done by sending a letter to the IRS or calling the IRS. The IRS e-services allow tax professionals to request abatement.
• After paying the penalty, taxpayers can ask for a refund by completing Form 843, Claim For Refund, And Request For Abatement. The return must be filed within three years from the due date or filing date.

There are reasons to request abatement

There are generally four categories of relief from penalties: reasonable cause, statute exceptions, administrative waivers, and corrections by the IRS. The administrative waiver is a category in which the IRS can formally interpret or clarify any provision to provide administrative relief from penalties it would otherwise assess. An IRS administrative waiver can be addressed in a policy statement or news release. It may also address other formal communications stating that the IRS policy is to provide relief from penalties under certain conditions. FTA is the most common administrative waiver.

Waiver of Abatement for the First Time

FTA was established by the IRS in 2001 to ensure that penalties are reduced consistently and fairly. It also rewards past compliance and encourages future compliance. An administrative penalty waiver is available to first-time taxpayers who are not compliant with tax laws. It allows them to request the abatement of penalties for a single tax period: one tax year for an individual or business income taxes, and one quarter for payroll taxes.

TIGTA reported that for 2010, the average tax year 2010 individual failure to file abatement under FTA was $240 and the average failure to pay abatement was $84. However, more than 90% of people who were eligible for FTA in 2010 did not get it. The IRS doesn't make FTA available as a relief option in its penalty-related notices and on its website.

This article will discuss how to determine if a client is eligible for FTA, and how to request it at the IRS.

Penalties that are eligible for an FTA

FTA is only applicable to certain penalties or certain returns. Determine first if FTA applies to the client's particular situation.

• An individual taxpayer can apply for an FTA to waive penalties and fail-to-pay or file late fees. FTA waivers are not available for estate and gift tax returns.
• FTAs may be requested by payroll taxpayers and business taxpayers for failure to file, failure to pay, and/or failure to deposit penalties. Although the Internal Revenue Manual (IRM) does not specify, in practice, FTAs can be requested by business and payroll taxpayers to cover late-filing penalties for S corporations and partnerships.
• FTA does not allow taxpayers to waive the estimated tax or accuracy-related penalties.

Clean Compliance Criteria

The practitioner must determine if FTA applies to the client's case. This involves the most complex part of requesting an FTA. The client must show compliance with filing and payment requirements and have a clean record of any penalties.

The client must comply with the filing compliance rule by having filed or extended all required returns. There must also not be an IRS request for unfiled returns. The client must have also paid or arranged for payment of any tax due to meet the payment compliance requirement. As long as the client is current on their installments, an open installment agreement can be entered into by him. The IRM states that the IRS should offer a taxpayer who is not in compliance with the payment requirements and opportunity for compliance and thereby be eligible for an FTA. Before the IRS determines whether the penalty can or cannot be reduced, a reasonable cause must be shown.

The client must not have had any penalties exceeding a "significant" amount in the three prior years. This is required to meet the requirement for clean penalty history. IRS procedures do not publicly define a "significant" amount. The IRS does not publicly define a "significant" amount in practice. If the IRS denies a client's request due to a small penalty assessment, they should remind them of the IRM "significant" qualification.

If the client has a clean record of penalty violations, they will be disqualified from an FTA.

• A penalty that was assessed more than three years before the tax return in question.
• Any reasonable cause relief from penalties received in the past.
• Have received an FTA for more than three years before the tax return in question.
• Penalties for subsequent tax years.

Requesting an FTA

Per phone or e-services: A practitioner can request an FTA if they determine that the client is eligible. There are many ways to request this FTA. Begin with the simplest methods. Start with simple methods. Accounts Management representatives have the authority to grant an FTA.

An IRS compliance unit will assess the penalty. This means that you cannot request an FTA from a PPS representative, or via e-services. A taxpayer with an IRS Collection or Appeals case, or who is underreported inquired, will be subject to penalties based upon the facts and circumstances. Penalty relief must usually be requested from the unit that assessed the penalty.

Remember that the IRS has an unpublished ceiling on how many penalties the IRS can abate under FTA via phone or e-services (known as oral statement authority). For tax administration purposes, the IRS removes the threshold amount for oral statement authority in its IRM.

The IRS may require taxpayers to submit documentation to support their claim to make reasonable-cause determinations. An IRS representative will accept "credible information" either orally or in writing. The representative will be prompted by the automated Reasonable Cause Assistant of IRS (see below) to request documentation. If penalties are greater than the threshold, waivers will still apply. However, IRS procedures require that FTA requests be made in writing. 23 When requesting an abatement of penalties amounts exceeding ten thousand dollars, it is advisable to ask for an FTA in writing.

In writing To increase your client's chances of having the penalty lifted, include any other relevant penalty relief arguments including reasonable-cause arguments.

If there is clear and reasonable cause for the penalty, the client should present the reasonable-cause argument first. The IRS will then abate the penalty based on these grounds. This is a good practice as the client might need to use FTA waivers for subsequent years. An abatement due to reasonable cause will not prevent the client from receiving an FTA.

The IRS may refuse to grant an FTA if the client is technically ineligible for one because of a penalty within the last three years, but the client is otherwise compliant. The IRS should be reminded that FTA is not applicable and the client's compliance history, excluding the one instance of noncompliance, is clean.

If the client has multiple years' worth of penalties, you can request an FTA for that first year. The previous three years must have had a clean compliance record. Other arguments such as reasonable cause can be used if applicable.

Example: C late-filed returns with a balance due from 2010 through 2012. The IRS assessed C's failure to file and failure to pay penalties for all years. In addition, she has assessed an estimated tax penalty in all years for not having paid enough estimated taxes and withholding. These were the first instances of noncompliance by the taxpayer. C The tax professional for the taxpayer determines that there is a reasonable cause for her 2012 noncompliance based on her facts, circumstances, and the application reasonable-cause criteria. The tax practitioner requests an FTA to abate the penalty of failure-to-pay and failure-to-file penalties for 2010. FTA waivers cannot reduce the estimated tax penalties.

The IRS service center should receive the written FTA request.

IRS Abatement Decisions Often Flawed

The IRS uses an automated tool to evaluate the request of a taxpayer or practitioner who calls or writes to it. The Reasonable Cause Assistant (RCA) is a software program that aids in the application of penalty abatements uniformly. This program was created to assist IRS employees in making penalty relief decisions for individuals (failure-to-file penalties and failure-to-pay penalties) as well as businesses (failure–to-deposit penalties). This program is required by the IRS to be used by employees to determine penalty abatement requests.

Although the IRS tried to apply penalty abatement determinations uniformly and consistently, the IRS's use of the automated RCA led to inaccurate determinations, including the FTA decision. A 2011 IRS Advisory Council report found that 55% of penalty abatement requests were incorrectly determined by the RCA. A TIGTA 2012 report found that 89% of the abatements made using the RCA were incorrect. TIGTA employees did not correct any of the incorrect determinations in the TIGTA sample. This was even though the determinations were inconsistent with IRM penalty abatement procedures. IRS employees have the right to abort the RCA process if it conflicts with penalty abatement policies. If an IRS employee cancels the RCA process, he/she can make a decision based upon whether the facts of the taxpayer meet the requirements for FTA qualification.

Before contacting the IRS, be prepared to research the client's compliance history and apply the qualification rules. If the representative claims that the client qualifies, but the client is not, the representative can override the RCA determination. Ask the representative for his manager if he refuses to override it. If all other options have failed, you can contact the Taxpayer Advocate Service for assistance. Remember that IRS representatives are often not trained in the use of the RCA and can make mistakes. A practitioner who is certain the client is eligible can call back to request an FTA if the IRS representative is not clear about the program.

A practitioner can, in most cases, obtain an FTA from the IRS PPS representative if they have the facts and qualifications.

Confirmation of FTA

An FTA is a letter that the IRS sends to a client. It includes Letter 3502C or 3503C for an individual failure-to-file and failure-to-pay penalty abatement, and Letter 168C (or an equivalent) business failure-to deposit penalty abatement. The letter is usually delivered within four weeks of the IRS granting the FTA.

Future of FTA

As it works to close the $450 billion annual tax gap, encouraging compliance is one of its main goals. Penalties have been used by the IRS to achieve this end. The number of penalties imposed has increased by 34% over the past 11 years from 28.3million penalties in 2002 to 37.9million in 2012. But, to encourage voluntary compliance, the IRS must enforce penalties fairly and consistently.

Why not grant an FTA to all taxpayers who are eligible in the interest of consistency? To promote fairness, the TAS suggested that this concept be implemented. The TAS suggested that the FTA waiver should be applied automatically before the penalty is assessed in its 2010 report to Congress. This would replace the requirement for taxpayers to request one. FTA waivers are intended to encourage compliance in the future and reward compliance. TAS's 2010 report noted that the number of penalty abatements has declined as penalties have been assessed. This shows that FTA and other penalty relief options are not encouraging compliance.

However, the FTA could be denied to all eligible taxpayers. This could lead to a weakening of penalty administration. For the IRS to encourage compliance, it is a tangible opportunity to provide abatement notices to taxpayers. The IRS communicates with taxpayers through the abatement notice and associated discussion. This is a quantifiable way that the IRS can make sure they understand the consequences of non-compliance in the future.

In its response to the 2010 TAS report to Congress, the IRS stated that it is examining whether FTA improves compliance and whether a system should be developed to allow FTA waivers before penalty assessments. The IRS has yet to conclude the study.

The IRS must create a uniform policy that eliminates errors due to reliance on its RCA. It also needs to train the personnel who will be reviewing penalty abatement requests to ensure consistency. In 2011, the IRSAC Small Business/Self-Employed subgroup recommended that the IRS develop a clear penalty abatement request form that would guide taxpayers in evaluating their circumstances against penalty abatement criteria, including FTA. This form would clarify the requirements for penalty abatement and allow taxpayers to request it. It also will make it easier to be fair and consistent. This form should be available to practitioners in the future.

Report points out that Form 843 Claim For Refund can be used to reduce penalties. However, it was not created for that purpose as it doesn't direct taxpayers on how to comply with abatement requirements. IRSAC stated that the Form 843 instructions regarding penalty abatement are "confusing at worst." It is not intended for unpaid penalties. It is meant to be used for refund requests after payment, and not for penalty nonassertion. Form 843 Instructions were updated in December 2012. However, they did not allow it to address potential penalty abatement arguments or simplify abatement requests.

TIGTA and TAS report highlight the inconsistent application of penalty reduction by the IRS. The IRS is likely to make changes in its procedures and requirements for requesting and granting penalties abatements. If the client is eligible, the practitioner can request and obtain relief from the client's penalty charges using this beneficial, but a largely unexplored administrative waiver.

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How IRS Property Seizures Works & How to Stop an IRS Tax Seizure

The IRS can seize property if taxpayers fail to pay the federal income tax owed. The IRS can impose the most severe penalties, including property levies. You need to be familiar with levies and how you can avoid them if you are behind in your taxes.

The IRS Seizure Process

The IRS must follow a three-step process to legally seize your assets. There are exceptions. These steps are intended to ensure that the IRS properly notifies you and follows all laws before issuing any levy.

• The IRS sends you a "Notice Of Demand for Payment". In other words, it sends you a tax invoice.
• While the IRS waits to hear back, you ignore, neglect, or fail to make payments arrangements.
• The IRS issues the Final Notice of Intent to Levy, and Notice of Your Rights to a Hearing.

The final notice is sent to the taxpayer by registered or certified mail. You have 30 days to appeal or make payment arrangements. After 30 days, if you do not make arrangements, the IRS may take your assets.

There are some exceptions to these rules, where the IRS doesn't have to give you a hearing within 30 days of seizing property.

• The IRS believes that tax collection is in danger. This is known as a jeopardy levy.
• The IRS can seize your state refund (with a or CP504), which is not a Final Notification of Intent to Levy.
• To collect taxes owed to a federal contractor, the IRS issues a levy
• A DETL (disqualified employment tax levy)

Even with the exceptions, however, the IRS must still send you an appeal right after issuing the levy.

Types of property subject to IRS Seizures

Even if you don't have physical possession of the property, the IRS can seize it. The IRS can seize your boat stored at a friend’s house.

The IRS can also collect salaries from clients, payments from tenants, rent from tenants, money in your bank account, and retirement funds. The IRS contacts the person who holds your money and asks them to send it to the IRS.

The IRS can effectively take everything, including your home. The IRS can take your possessions, tools of the trade, and livestock if any. To determine wages that are exempt from the IRS levy, you can consult a table that is based on your filing status and any exemptions.

Types of property the IRS cannot touch

The IRS can seize income, wages, or property from a variety of sources. There are however a few items that the IRS won't levy.

• Minimum exemptions for salaries and other income
• Unemployment benefits
• Workers' Compensation
• Income for court-ordered child maintenance payments
• Certain annuity payments and pension payments
• Certain service-related disability payments
• Assistance under the "Job Training Partnership Act".
• Tools required for a trade, business, or professions up to a certain value
• Furniture and household goods up to a specified amount
• Because it is a principal residence, most cases require a U.S. District Court judge's approval to sell.

Requesting a Collection Due Process Hearing

You can appeal a notice of intent levy by requesting a Collection Due Process hearing. You must submit (Request to a Collection Due Proceed or Equivalent Hearing). Consider working with a tax professional to ensure that the appeal is successful.

You will present your case to the IRS at the collection hearing. You might argue that the IRS wrongly assessed your tax liabilities, or that you have already paid taxes. You may be able to bring these arguments forward if you feel that the current spouse or ex-spouse should not owe tax. You can also appeal to your tax professional if you have other reasons.

The Office of Appeals will decide on your case once you have attended your CDP hearing. You have 30 days to appeal if you disagree.

Stopping the Levy On Your Wages, Tax Refunds, or Bank Account

The IRS can levy or garnish your wages until you either pay the full amount or the IRS releases the levy. The IRS will keep any tax refunds during this period and apply them to your tax amount. You can stop a wage garnishment by paying the taxes owed to the IRS or entering into an agreement with them. Consider working with a tax professional.

The bank will freeze the funds for 21 calendar days if the IRS decides to levy your bank account. The bank then sends the money directly to the IRS. You must quickly reach an agreement with the IRS to stop the levy during the 21-day hold period.

How a Property Levy works

A revenue officer will visit your business or home if the IRS decides that it wants to seize your property. They first take public assets. They may remove vehicles that are parked in front of your home. They will then request access to your private areas, such as your home or business. If you give your consent, they can enter the garages, homes, and other areas. They will also take any assets that are there if you consent.

You will be issued a Write of Entry if you refuse to give the revenue officer permission for them to enter your private property. This legal document is similar to a warrant. It comes from the courts. This document permits the revenue officer to enter your private areas to seize property.

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