IRS Penalty? Please Read This

October 6th, 2024 at 6:24 AM

Have you recently received correspondence from the IRS with the claim that you owe a penalty for late filing, late payment, or missed employment tax deposits, I urge you to pause before making any payment. You may not have to pay that penalty at all.

The IRS often imposes steep penalties for filing tax returns late, failing to pay taxes on time, or not depositing employment taxes correctly. However, several strategies can help you get those penalties removed—and in some cases, even refunded if you have already paid them.

Common IRS Penalties and Their Impact

Some of the most common penalties include:

• Late filing penalty. For individual or C corporation returns, this can be up to 5 percent of the unpaid tax for each month the return is late, maxing out at 25 percent. Partnerships and S corporations can incur penalties of $245 per partner or shareholder per month.
• Late payment penalty. This penalty is generally 0.5 percent of the unpaid tax per month, maxing out at 25 percent.
• Failure to deposit employment taxes. This penalty ranges from 2 percent to 10 percent, depending on how late the deposit was.

Strategies for Relief

Here are a few ways to potentially avoid or reduce these penalties:

First-time abate. If this is your first time receiving a penalty—or your first time in over three years—you may be eligible for a “first-time abate.” This is one of the easiest and most common ways to remove a penalty. It applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. As long as your tax compliance history is clean, you may qualify.

Partnership relief. If your business is a partnership with 10 or fewer partners, and if all partners filed their tax items on time, you may be eligible for relief under Revenue Procedure 84-35. This is a little-known but effective option.

Reasonable cause. If neither of the first two options applies, you can request penalty relief by showing that there was a reasonable cause for your late filing or payment. This could include illness, a natural disaster, or other significant life events that impacted your ability to meet IRS deadlines.

Next Steps You can remove many penalties with a simple phone call, and using the right approach and trigger words when speaking to the IRS can make all the difference.

If you have already paid the penalties, you can use IRS Form 843 to file for a refund if you do so within three years of filing the return or within two years of paying the penalty.

Mark S. Fineberg, CPA