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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • What are the most common IRS penalties and how do I get rid of them?

    suspiciousIRS Penalties are a fact of life unfortunately.  They are a revenue “stream” for the IRS and not one that it will give up easily.

    When the IRS sends you a bill from the negative results of an audit, it will add a penalty or two to the bill. Interest is also conveniently attached to the underlying new debt and the penalty as well.

    These penalties were originally designed to be a punishment. A punishment meant to deter bad conduct. They are now a dependable source of income for our ever expanding government. Many tax experts consider the billions a year assessed as penalties to just be a tax and not a real deterrent.

    Let’s look at some of these penalties just to give you an idea what you are facing.

    Failure to Pay Penalty

    The IRS gets to tack on ¼% to 1% each month of the amount you didn’t pay on time, ½% to start and drops to ¼% once you arrange a payment plan. If you fail to pay and a notice of intent to levy is issued – the penalty can be raised to 1%. It is imposed monthly.

    Failure to File Timely Penalty

    If you filed the return late – the penalty is 5% per month on the balance due up to 25% of the total debt. This penalty tops out if 5 months and 1 day after the return was originally due you still have filed the tax return. If you file but no debt is owed – there is no penalty. Some non income tax/personal returns have other rates.

    Accuracy Penalty

    The IRS gets to stick an additional 20% penalty to the tax bill if the IRS auditor decides that you understated your tax liability. This is very common.

    Fraud Penalty

    If the IRS decides that you omitted income on purpose i.e with fraudulent intent it can add a fraud penalty. This is a big one – 75% of the underreported amount.

    Also if it decides that you fraudulently failed to file tax returns, it can penalize you 15% for every month you didn’t file for five months. This one is relatively rare.

    The good news – if there is some to be found….

    The IRS can remove a penalty if the taxpayer can prove that the failure to comply was due to some “reasonable cause”.

    You can make the reasonable cause argument before the penalty is imposed or after it is imposed. If accepted, the penalty be removed or never added in the first place.

    Penalties can be reduced in an offer in compromise, discharged in a bankruptcy or eliminated via the statute of limitations period as well.