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IRS Penalty Abatement
Penalty Abatement involves formally asking the IRS to remove certain penalties that have caused your IRS tax debt to balloon into a higher amount. It feels like the IRS assesses penalties for everything: not filing on time, not paying enough, breathing too much air. The last part isn’t true, but you get the point.
The major penalties the IRS assesses every day include:
1. Failure to File Penalty. This penalty is the biggest and most common penalty. If you don’t file your tax return on time, the IRS charges 5% of the unpaid tax per month, up to 25% total.
2. Failure to Pay Penalty. This penalty applies when you file your return but do not pay the balance owed. The penalty is 0.5% of the unpaid tax per month, up to 25% total.
3. Accuracy-Related Penalty. This penalty is usually a 20% penalty on the portion of tax that was understated. It applies when the IRS determines that the tax was incorrect due to things like negligence or disregard of rules, substantial understatement of income tax, overstated deductions or credits, and substantial valuation misstatements. For individuals, a substantial understatement usually means the understatement is greater than the larger of $5,000 or 10% of the correct tax.
4. Estimated Tax Penalty. If you do not pay enough tax throughout the year through withholding or quarterly estimated payments, the IRS can charge an underpayment penalty. This penalty commonly hits self-employed individuals, investors, people with large capital gains, and people who reduce withholding too much. Basically, it functions similar to interest on the amount that should have been paid during the year.
What makes the penalty abatement process difficult for non-IRS experts is that the IRS treats certain penalties differently. For example, a savvy tax attorney can resolve failure to file and failure to pay penalties with First Time Penalty Abatement. But, the same can’t be said for abating estimated tax or accuracy-related penalties.
Those penalties require reasonable cause in order to be abated. Reasonable cause is a legal standard the IRS uses to decide whether penalties should be removed when a taxpayer can show they made a genuine effort to comply but were prevented by circumstances outside their control. Common examples include serious illness, natural disasters, records destroyed by fire or theft, reliance on incorrect written IRS advice, or other events that made it impossible or extremely difficult to file or pay on time.
Getting penalties removed for reasonable cause is often a lengthy process because the IRS requires detailed documentation and a written explanation showing exactly what happened, when it happened, and how it directly caused the compliance failure. The request usually has to be reviewed by an IRS employee who evaluates the facts under internal guidelines, and if it is denied, the taxpayer may need to appeal the decision or submit additional evidence, which can stretch the process out for months.
IRS Penalties for Self-Employed Individuals
Self-employed individuals face IRS penalties more often than traditional employees because taxes are not automatically withheld from their income. Freelancers, independent contractors, and small business owners must estimate their taxes and make quarterly estimated tax payments throughout the year.
If those payments are missed or underestimated, the IRS can assess estimated tax penalties, failure to pay penalties, and interest, which can quickly increase the amount owed.
Many self-employed taxpayers do not realize they qualify for penalty abatement or IRS relief programs that can significantly reduce their tax balance.
Talk to a Las Vegas Tax Attorney who handles IRS Penalty Abatement.
It gets tricky. If you’re dealing with the IRS, getting clear answers early can make a significant difference in how your case is resolved. Whether you’ve received a notice, are facing collections, or simply want to understand your options, we’re here to help.
Contact Keeton Tax Law PLLC to speak directly with attorney Chandler R. Keeton about your situation. Call 702-530-9709 or use the contact form to schedule a confidential consultation.