IRS Penalty Relief: Avoiding and Reducing Common Penalties
If you’ve recently received an IRS notice claiming penalties for late filing, late payment, or missed employment tax deposits, take a moment before making any payments. You might not need to pay the penalty at all.
The IRS frequently imposes significant penalties for late filings, missed payments, and incorrect employment tax deposits. However, there are several strategies to reduce or even eliminate these penalties — and in some cases, you may even be eligible for a refund if the penalty has already been paid.
Common IRS Penalties and Their Impact
Here are some of the most common penalties and what they could mean for your tax bill:
Late Filing Penalty: For individuals and C corporations, this can be up to 5% of the unpaid tax for each month the return is late, capped at 25%. Partnerships and S corporations face penalties of $245 per partner/shareholder per month.
Late Payment Penalty: Typically, this penalty is 0.5% of the unpaid tax per month, also capped at 25%.
Failure to Deposit Employment Taxes: Ranges from 2% to 10%, depending on how delayed the tax deposit was.
Understanding these penalties can help you decide if relief options apply to your situation.
Strategies for Penalty Relief
Here are a few ways to potentially reduce or remove penalties:
1. First-Time Abatement (FTA)
If this is your first penalty in at least three years, you may qualify for an FTA, which is one of the most commonly used options to remove penalties. It applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. A good compliance history is essential to qualify.
2. Partnership Relief under Revenue Procedure 84-35
If your business is a partnership with ten or fewer partners, and all partners filed their tax items on time, you may qualify for relief under this lesser-known option. Revenue Procedure 84-35 allows certain partnerships to avoid penalties, provided all partners are fully compliant.
3. Reasonable Cause Relief
If neither of the first two options applies, you can request relief by showing “reasonable cause” for the late filing or payment. Valid reasons may include illness, natural disasters, or other life events that impacted your ability to meet IRS deadlines. Documentation to support your case is often required, but this option can be effective when significant hardships have occurred.
Next Steps
If you think any of these relief strategies may apply to your situation, I’d be happy to assist you in navigating the process. Many penalties can be removed with a straightforward phone call using the correct approach and terminology, which can be crucial when speaking to IRS representatives.
If you’ve already paid penalties, you can use IRS Form 843 to file for a refund within three years of filing the return or within two years of paying the penalty. I’m here to guide you through this if needed.
Remember: Penalty relief options are available, and we’re here to help you explore the best route for your specific case.