Can you do anything about IRS 941 payroll late filing penalties and interest?
This is an answer to another question that was emailed to us. The IRS has 150+ penalties that can applied if you owe back taxes. Below is a discussion about the main penalties that cause most of the growth rate. If you have further questions, please post them here, email us at firstname.lastname@example.org, or call us at 800.337.9629 x315. If you call, please let us know it’s in regard to a specific blog post.
The IRS does offer taxpayers the possibility of reducing their penalties through penalty abatement. If a taxpayer is able to provide sufficient reason for the accrual of the tax liability in question, the IRS can abate some or all of the penalties associated with that liability. If these tax penalties are abated, any interest that accrued on those penalties is also forgiven. Interest that accrues on the principal portion of a tax problem is not considered under the IRS Abatement program and will have to paid just like the principal tax. If you are considering hiring tax help, be wary of anyone that encourages you to believe that interest is negotiable. This is usually a poor sales tactic from someone badly trained or worse.
Generally speaking, you will not have to pay a penalty if you show a good reason (reasonable cause) for the way you treated your tax liability in light of your circumstances. You must also show that you acted in good faith.
Specifically, the IRS provides seven examples of “sound cause of delay which, if established, will be accepted as reasonable cause,” for the abatement of penalties. As with any argument, the more reasonable cause arguments you are able to substantiate, the better your chances of success. The following examples provide the best possibility of success:
1. Death or serious illness of a taxpayer or death or serious illness in his/her immediate family;
2. Unavoidable absence of taxpayer;
3. Destruction by fire, other casualty or civil disturbance of a taxpayer’s residence, place of business or business records;
4. Inability to obtain records;
5. The taxpayer mailed his/her return or payment in time to reach the Internal Revenue Service office within the prescribed time period with the normal handling of the mail. Through no fault of the taxpayer, the return was not delivered within the prescribed time period.
6. Reliance on erroneous information (written or oral) from an employee of the Internal Revenue Service. The IRS’s failure to provide the taxpayer with requested information/forms necessary for filing/paying.
7. Reliance on erroneous advice from a competent tax advisor.
While establishment of one or more of the above detailed causes provides the best chance of successful penalty abatement, the IRS does provide that a taxpayer may establish reasonable cause and that any reason for delinquency in filing or making deposits or payments which established that the taxpayer exercised “ordinary business care and prudence but was nevertheless unable to comply within the prescribed time will be accepted as reasonable cause.” So how well you present your argument matters.
When dealing with an IRS Revenue Officer, it’s important to understand the abatement procedure as well as your appeal rights. You must use the formal process to maximize your success. If your RO says “write me a letter about what happened and I’ll let you know” it’s much easier for them to deny your rights. The proper way to initiate a penalty abatement is to prepare a timeline of events, document those events, prepare an IRS Form 843 Request for Abatement and then be prepared to appeal it past the RO. Do not miss the appeal deadline, as it will forfeit your rights.
If you owe $20,000 or more in penalty, it’s probably a good idea to hire someone with experience. You only have one real shot at this, and you want to wring as much efficiency as you can out of the formal process. No matter how much you owe in penalty because of your back taxes, always pursue an abatement through the formal process and dedicate the proper amount of time to the task. If you don’t ask, you won’t get. We have seen abatements happen for ridiculous reasons, and abatements fail that truly deserved it. Success and failure of penalty abatements occur because of the preparation and commitment to procedure, or lack thereof.
Now, let’s take a look at the most common tax penalties and how they are calculated and applied to overdue taxes.
There are two types of penalty commonly incurred that may be assessed against a delinquent taxpayer. Each is calculated differently.
Failure to File Penalty
The failure-to-file penalty is calculated based on the time from the deadline of your tax return (including extensions) to the date you actually filed your tax return. The penalty is 5% for each month the tax return is late, up to a total maximum penalty of 25%. The percentage is of the tax due as shown on the tax return.
Failure to Pay Penalty
The failure-to-pay penalty accrues at 0.5% for each month the tax is not paid in full. There is no maximum limit to the failure-to-pay penalty. The penalty is calculated from the original payment deadline until the balance due is paid in full.
Interest Rates for the IRS are variable and adjusted quarterly. Currently, the IRS interest rate for underpayment of tax is 4% per year. The interest is calculated daily on any unpaid balance. The historical federal interest rates are available here: http://www.taxalmanac.org/index.php/Federal_Underpayment_Interest_Rates