Removing IRS Interest and Penalties

IRS Interest on Balance Due and Penalties

If you fail to pay your taxes, it can result in IRS penalties – and also compounding interest, which makes your tax liability substantially larger than the initial balance due. Non-payment of this liability can result in even more IRS penalties and interest, a levy on your wages or bank account, a lien against your property, or even a seizure of your assets if left unresolved. Over time, penalties and interest can double a tax liability.

What Interest Rate Does the IRS Charge?

The IRS can charge interest for both under and over-payments, but under-payment or non-payment are much more common than over payment of taxes.

We will discuss underpayment because it’s by far the most common problem. Interest is charged on any unpaid tax from the due date of the tax return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily. The net effect is that the interest rate has fluctuated from from as low as 3% to as high as 8% over the last decade.

Can Interest Accrual be Stopped before a Tax is Repaid?

Misinformation on IRS interest is very common. We have heard many unlicensed “tax professionals” tell people with tax problems that they (said professional or their company) can get the IRS to halt interest charges. If anyone ever tells you this, they did you a great favor by essentially letting you know that they are dishonest or incompetent, or both.  Interest never stops accruing.  Interest is charged on any unpaid tax from the due date of the tax return until the date of payment in full.

Exceptions

  • Disasters: The IRS has in the past and may in the future designate a suspension of interest accrual surrounding circumstances in which an Natural Disaster has played a part.
  • Penalties: Interest charged on a tax penalty can be reduced or removed when a penalty is first reduced or removed. If an unpaid balance, however, remains, interest will continue to accrue until the balance due is full paid.

Penalties

When does the IRS Charge Penalties?

This list is long. At last count there were 58 actions or non-actions that qualify for a penalty. The most relevant circumstances, however are variations on failure to file taxes or errors & omissions on tax filings (there are at least 15 sub-penalties surrounding just Schedule Ks), failure to make tax deposits, and failure to pay taxes.

Can Penalties be Removed?

There are some circumstances under which the IRS will reduce or remove penalties. This is called an Abatement of Penalties. To submit this abatement request to the IRS, a taxpayer must have reasonable cause that is specific for each year and must be able to explain why the penalties should be removed.

Bad Advice

If you received advice from the IRS that was erroneous and the cause of the penalty, that may be grounds for a penalty abatement.

First Time Penalty Abatement

The IRS can reduce penalties if the following are true:

  • You filed all currently required returns or filed an extension of time to file
  • You didn’t previously have to file a return or you have no penalties for the three tax years prior to the tax year in which you received a penalty
  • You have paid, or arranged to pay, any tax due

Note: It may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the IRS’ first time penalty abatement policy because the failure-to-pay penalty continues to accrue until the account is paid in full.

Non- First Time Penalty Abatements

In fact, there are six main reasons the IRS will accept for an abatement of IRS penalties. They include:

  • Death or serious illness of the taxpayer or member of his/her immediate family. In the case of a corporation, estate, trust, etc., the death or serious illness must have been of an individual having sole authority to execute the return or make the deposit or payment or a member of such individual’s immediate family.
  • In the case of the unavoidable absence of the taxpayer, a corporation, estate, trust, etc., the absence must have been of an individual having sole authority to execute the return or make the deposit or payment.
  • Destruction by fire or other casualty of the taxpayer’s place of business or business records.
  • The taxpayer was unable to determine amount of deposit or tax due for reasons beyond the taxpayer’s control. However, this cause will be acceptable for taxpayer’s required to make deposits or payments of trust fund taxes only when the taxpayer was unable to have access to his/her own records.
  • The facts indicate that the taxpayer’s ability to make deposits or payments has been materially impaired by civil disturbances.
  • Lack of funds is an unacceptable reasonable cause for failure to pay any tax or make a deposit under the Federal Tax Deposit System unless  the lack of funds meets reasonable cause criteria for the failure-to-pay penalty.

Required Documentation

Based on all the facts of the circumstances surrounding the penalty accrual, the IRS will consider any reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.

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