A tax bill from the Internal Revenue Service (IRS) is likely to induce sticker shock. With interest charges and penalties tacked on to what was already owed, the charges due can be more than twice the original bill. And once the IRS assesses penalties, it assumes they’ve been accepted—unless the taxpayer complains. That’s where your tax consulting services come in.
The good news is that the IRS can cancel interest and penalty charges just as easily as it assessed them as long as your client can show a reasonable cause for failure to pay on time, says tax and bankruptcy attorney Haleh C. Naimi. Naimi discloses tips for removing these added charges from tax bills in her Eli Financial webinar, “Canceling Penalties & Interest: Tips from the Tax Trenches.”
First: File On Time, No Matter What
The IRS has a number of penalties it can assess both for failure to file and failure to pay. In general, though, failure-to-file costs more than failure-to-pay. So be sure to advise clients to file even if they can’t write a check. The late-filing penalty is normally 5 percent of the taxes due per month after a tax return is late, though it is capped at 25 percent.
Failure to pay, meanwhile, is between 0.5 and 1 percent of the unpaid taxes per month. If a taxpayer requests an extension and pays 90 percent of taxes due, he could get out of the penalty.
If a taxpayer earns both a failure-to-file and a failure-to-pay red flag, then the total penalty remains 5 percent.
More: And then there’s the interest, which is compounded daily and fluctuates according to the federal short-term rate plus 3 percent, explains the Motley Fool.
The bottom line is that it’s cheaper for clients to file even if they can’t pay because “[t]he monthly penalty for not filing your tax return is 10 times higher than the penalty for paying late,” Motley Fool adds.
Next: Request an FTA
While the penalties aren’t pretty, the IRS has standard methods for addressing refund requests of paid penalties. The most common is the first-time penalty abatement waiver (FTA).
Your clients could qualify for this, the IRS says, if they:
- Did not previously file a return or went three years without a penalty
- Filed all currently-required returns or an extension
- Paid or arranged to pay any taxes due
“Despite the advantages of this IRS waiver, few taxpayers who qualify for FTA request it,” writes The Tax Adviser.
Why? “The problem is twofold: Most taxpayers and tax professionals do not know FTA exists, and IRS representatives often incorrectly disallow an FTA when using the IRS’s faulty automated decision tool to make penalty determinations.”
Or: Pay the Penalty & then Ask for a Refund
Another tool to be aware of is Form 843—Claim for Refund and Request for Abatement.
Form 843 is for requesting a refund of paid penalties, and it has several uses, explains H&R Block: “If you owe a large penalty, it may be best to pay the penalty to reduce the amount of interest you will pay, and then file a claim for refund,” H&R Block notes. “You must file this form within two years of the date you paid the penalties. Your claim for refund must include a reason for your request and supporting evidence.”
No, penalties and interest are not pretty, says Naimi. But knowing the remedies available for resolving them can save your clients hundreds or even thousands of dollars.
