We Help With IRS Penalties & Interest
“Penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the [Code].” I.R.M., pt. 220.127.116.11 (Nov. 21, 2017).
There are more than 150 different types of civil penalties, additions to tax, and additional taxes.
IRS tax penalties and interest can often exceed the amount of the underlying IRS tax debt.
The most common penalties are “additions to tax.” This includes penalties when taxpayers fail to submit timely tax returns, fail to pay their taxes timely, or fail to make timely estimated payments.
There are also:
- Accuracy-related penalties,
- Fraud penalties,
- Certain information returns and payee statement penalties,
- Tax return preparer penalties,
- Promoter and protestor penalties, and
- Compensation statements, pension plans, exempt organization, education programs and other reporting penalties.
The amount of the IRS tax penalty can range from less than 1% to 100% of the underlying IRS tax debt. Some penalties accrue monthly and others are only imposed once.
Accuracy-related penalties warrant special mention. They are usually assessed at the close of an IRS audit. They can include:
- Negligence or disregard of rules or regulations (I.R.C. § 6662(b)(1))
- Substantial understatement of income tax (I.R.C. § 6662(b)(2))
- Substantial valuation misstatement (I.R.C. § 6662(b)(3))
- Substantial overstatement of pension liabilities (I.R.C. § 6662(b)(4))
- Substantial estate or gift tax valuation understatement (I.R.C. § 6662(b)(5))
- Disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law (I.R.C. § 6662(b)(6))
- Undisclosed foreign financial asset understatement (I.R.C. § 6662(b)(7))
Inconsistent estate basis (I.R.C. § 6662(b)(8))
The IRS generally has the ability to not impose these penalties and to abate them once assessed. In most cases, one has to be able to show “reasonable cause” to have the penalties not imposed or abated after they are imposed.
There are several other penalties that the IRS can impose. Each penalty has its own nuances and defenses.
Reasonable Cause as a Defense
Reasonable cause is based on all the facts and circumstances in the situation. The IRS will abate most penalties based on reasonable cause if the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless is unable to comply.
Reasonable cause may be based on:
- Reliance on a tax advisor
- Death, serious illness, or unavoidable absence
- Fire, casualty, natural disaster, or some other disturbance
- Inability to obtain records
- Ignorance of law in conjunction with other facts & circumstances
- Misfeasance by employee or agent leaving taxpayer “incapacitated” or “disabled”
- Financial hardship
These are just a few of the more common justifications.
Remove IRS Interest
Interest on tax debts begins to accrue from the time that the tax liability was to be paid, which is typically the date the tax return was filed or should have been filed.
The IRS often waits many years before notifying taxpayers and taking action to collect unpaid taxes. This delay can result in the tax debt incurring a large amount of interest. This interest is then added to the underlying tax debt and is fully collectible by the IRS.
The interest rules can be complex. This complexity results in the IRS collecting more in interest than it is entitled to collect. An experienced tax attorney can help to ensure that taxpayers do not pay penalties and interest that they are not obligated to pay.
Tips for Removing Penalties & Interest
The most effective way that taxpayers can reduce or eliminate IRS tax penalties and interest is to show that they do not owe the underlying tax liability.
Another way is to show that there was an unreasonable delay attributable to the government, that the taxpayer relied on bad advice from the government, or that the taxpayer was not timely notified of his or her tax liability.
The IRS may be willing to negotiate a reduction in tax penalties and interest, especially if the taxpayer can show that they made an honest mistake.
Get Help With Your IRS Penalties
We are experienced tax attorneys in Houston, Texas. We help clients remove or abate IRS and state tax penalties.
If you have a tax penalty, we want to hear from you.