Tax Penalties

IRS Tax Penalties and Interest

IRS penalties may be reduced if the taxpayer can demonstrate that he had a reasonable cause for the error or delinquency giving rise to the penalties. IRS has developed detailed regulations addressing the forgiveness of tax penalties.

Interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3 percent. That rate is determined every three months.

In addition, if you filed your IRS tax return on time but didn't pay on time, you'll generally have to pay a late payment penalty of one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid after the due date, not exceeding 25 percent. The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy.

Beginning January 1, 2000, if you filed a timely return and are paying your tax pursuant to an installment agreement, the tax penalty is one-quarter of one percent for each month, or part of a month, that the installment agreement is in effect.

If you did not file on time and owe tax, you may owe an additional penalty for failure to file. The combined penalty is 5 percent (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%. The late filing penalty applies to the net amount due, which is the tax shown on your return and any additional tax found to be due, as reduced by any credits for withholding and estimated tax and any timely payments made with the return. After five months, if you still have not paid, the 0.5% failure-to-pay penalty continues to run, up to 25%, until the tax is paid. Thus, the total penalty for failure to file and pay can be 47.5% (22.5% late filing, 25% late payment) of the tax owed. Also, if your return was over 60 days late, the minimum failure-to-file penalty is the smaller of 0 or 100% of the tax required to be shown on the return.

The IRS allows you to avoid tax penalties if you have a good excuse, known as reasonable cause. The following information is excerpted directly from the Internal Revenue Manual, IRM 120.1.

Reasonable Cause

1. Reasonable cause is based on all the facts and circumstances in each situation and allows the Service to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations
2. In the interest of equitable treatment of the taxpayer and effective tax administration, the nonassertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the Internal Revenue Code (IRC), Regulations (Treas. Regs.), Policy Statements, and Part 120.1.
3. Reasonable cause relief is not available for all penalties; however, other exceptions may apply.

1. For those penalties where reasonable cause can be considered, any reason, which establishes that the taxpayer exercised ordinary business care and prudence, but was unable to comply with a prescribed duty within the prescribed time, will be considered.
2. See IRM Exhibit 120.1.1-2, Penalty Relief-Application Chart. If a reasonable cause provision applies only to a specific Code section, that reasonable cause provision will be discussed in the IRM 120.1 chapter relating to that IRC section.
3. When considering the information provided in the following pages, remember that an acceptable explanation is not limited to those given in IRM 120.1. Penalty relief granted because the taxpayer provided an "other acceptable explanation" is identified by use of PRC 30 on either the closing or adjustment document.
4. The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer's failure to comply with the law was not due to willful neglect. See specific IRM sections for the rules that apply to a specific Code section.
5. Taxpayers have reasonable cause when their conduct justifies the nonassertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at.

Our experienced tax attorneys review each client's special situation to determine if any penalties might be waived. If our tax attorneys determine that a reasonable cause might exist, we aggressively pursue the abatement of the penalty.

Each client’s matter receives a detailed and thorough reasonable cause analysis, to determine if any penalties might be waived. If we determine that a reasonable cause might exist, we aggressively pursue the abatement of the penalty.

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