IRS Tax Problem Help

The first question some clients ask is “What are these penalties and interest on my IRS bill?  That is a good question; let’s take a look.

Most of the clients that come to me either have income tax returns that have not been filed or they filed them after the due date of the return.  Returns that are filed after the due date are assessed a late filing penalty, if tax is owed on the return.  This is simply a penalty for filing a return late.  The penalty is 5% for any part of a month, even one day, when a return is filed after the due date.  It doesn’t matter if the return is one-day late or 30 days late, the penalty is 5% of the tax owed.  The penalty continues to accrue for each month or part of a month late until it is 5 months late.  The late filing penalty stops after it reaches 25%.

There is also a penalty for paying the tax after the due date, not including extensions.  If your return is due on April 15^th and you mail it in but do not send in the taxes due or get an extension but do not send in the taxes due, you will owe a late payment penalty starting on April 16^th.  The late payment penalty is 6% per year.  This penalty stops after 50 months, because the late payment penalty stops after it reaches 25%.

On top of these two penalties the IRS also charges interest.  The interest varies over time.  Presently the interest is at the rate of 4%.  This interest is compounded daily.  I am often asked, “If I get an installment agreement will the penalty and interest stop?”  The simple answer is no!  If you have a car loan or a mortgage on your home, you know interest accrues each month.

If you have an unfilled return and there is a refund, there is no penalty or interest due.  The penalty and interest are a percentage of the tax owed; so if no tax is owed, no tax is due.

In some situations, taxpayers can get the IRS to remove the penalties and interest.  I will discuss requesting abatement of the penalty and interest in another post.

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Did you forget to get an extension for your IRS income tax return?  Are you in a panic?  What should you do?

The first thing to do is calm down.  This is not life or death.  The next thing to do is either prepare your tax return or hire someone to help you prepare your tax return.  What is the next step after you prepare the tax return?

If you have a refund there is no problem.  The IRS does not penalize you if you file late and have a refund.  The penalties and interest due on an income tax return are based on the amount owed.  If you do not owe any income tax there is no penalty or interest due.

Now you have prepared your income tax return and you owe income tax, what next?  The IRS assesses a penalty for filing a tax return late.  The penalty is 5% per month, or any part of a month (even 1 day).  The maximum amount of the penalty for late filing is 25%.

How do we stop the late filing penalty?  File the return as soon as possible.  If you file the return before May 15^th, you will only be subject to a 5% late filing penalty.  If you cannot get the return filed by May15th, file it as soon as possible after May 15^th.  But what if I am missing a piece of information needed to file my return?  Use your best estimate of the missing piece to prepare the return.  Once you know the correct amount, file an amended return if it is materially incorrect.

Can I get the late filing penalty removed?  It is possible to get the late filing penalty removed if you have what is called reasonable cause.  Reasonable cause is a reason beyond your control that kept you from filing a timely return.  Some possible reasons could be: you became ill the week the return was due, you were suddenly called out of town for work, you could be going through a messy divorce.  You will have a better chance of convince the IRS of waiving the late filing penalty if you can show you have a long standing record of timely filing and paying your taxes.  They are much more likely to waive the penalty for someone who has been in compliance in the past, rather than someone who habitually files late.

What should you do?  Stay calm, prepare the return, file the return and ask for a waiver of the penalty, if you have reasonable cause.

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