Last year, the IRS collected more than $3.4 trillion from taxpayers. Part of that total consisted of more than $11 billion in penalties on individual, trust, and estate income tax returns. [Source]
The $11 billion didn’t include penalties on early distributions to IRAs. In fact, there are multiple reasons the IRS penalizes taxpayers. Let’s take a look.
Common reasons for IRS penalties
The IRS has a long list of reasons to penalize taxpayers for mistakes or omissions on their tax returns. If you didn’t file your tax return, you would incur a failure to file penalty added on for the tax year.
The most common IRS penalties include:
| Reason | Penalty |
|---|---|
| Failure to file | 5% a month for up to 5 months |
| Failure to pay taxes on time | 5% – 25% |
| Failure to pay correct estimated tax | # days x current interest rate (~9%) |
| Bad check | 2% |
| Early distribution of IRA | Regular tax + 10% penalty |
| Penalty for taking nonqualified withdrawals from 529 plans or Health Savings accounts (HSAs) | 10% |
| Failure to take required minimum distributions from retirement accounts | 50% of RMD |
Anthony E. Parent, Esq. is co-founder and managing partner of Parent & Parent LLP, a tax preparation and consultation service.
“Countless IRS penalties exist, but the bulk come from not making tax payments on time or being late filing your tax,” he says.
Some common reasons for IRS penalties include:
Failure to Pay Penalty aka Failure to File Penalty (or late filing)
The Failure to Pay Penalty, also known as the Failure to File Penalty, refers to not filing your tax return on taxes owed when they’re due April 15. A failure to file your return can also mean not filing by the extended due date if you filed an extension.
- Failure to Pay Penalty: equals 5% of the unpaid taxes. The IRS charges this penalty for up to five months.
Failure to pay on time (late payment)
If you don’t pay your taxes owed on your tax return by the due date, you’ll have late payment penalties. Taxes owed are due on April 15, even when you file an extension.
- Failure to Pay Penalty: equals 5% of taxes not paid by the due date for each month or part of a month that the tax is overdue. The penalty won’t exceed 25% of the unpaid tax due. If the taxpayer doesn’t have sufficient funds to pay all of the tax, an installment agreement is established, an additional 0.25% is also due.
If the return is over 60 days late past April 15, there will be an additional late filing penalty. Be sure your tax returns are filed as soon as possible.
- Penalty: $435 or 100% of the tax owed, whichever is less.
Failure to pay correct estimated tax return
If you’re self-employed and expect to owe at least $1,000 in taxes, it’s necessary to pay estimated taxes. Failing to pay quarterly estimated tax payments will result in a penalty.
- Penalty: The IRS calculates penalties for missed estimated tax return payments. The IRS bases the penalties on the number of days late and multiplies by the current interest rate.
Bad check when paying your tax return
If your bank doesn’t honor your check or another payment form to the IRS, you will owe penalties on your tax return.
- Penalty: For checks of $1,250 or more, the penalty is 2% of the check amount. For payments less than $1250, the penalty 2% of the check amount or $25, whichever is less.
Early distribution on an IRA
Often, you will pay a penalty on your tax return if you withdraw from an IRA (Individual retirement account) before age 59 ½.
- Penalty: The IRA amount you withdrew is added to your gross income and taxed. There will also be an additional 10% penalty you owe.
Non-qualified withdrawals from 529 plans or Health Savings accounts (HSAs):
529 Plans and Health Savings accounts come with tax advantages. These advantages come with strings attached. If you don’t withdraw money at the right time for the proper purpose, you can be penalized quite a bit.
- Penalty amount: The IRS charges a 10% penalty on the entire distribution you took.
Failure to take RMD’s from retirement accounts:
If you fail to take out the Required Minimum Distribution (RMD) once you are 70 1/2 years old, the IRS can penalize you quite a bit.
- Penalty amount: The IRS charges a hefty 50% of your required minimum distribution.
Relief Options for Payment of IRS Penalties
Penalties for failing to pay the tax owed can add up. Many taxpayers don’t realize that there are penalty relief options that can save you money. Here are a few to consider.
Penalty Abatement
Parent says, “Taxpayers can call the IRS to get an abatement of at least one year of penalties.” With Penalty Abatement, you may get penalties wwqaived as well as interest reduced or removed. This can have a significant impact on the final amount you owe.
You’re eligible if you’ve had no penalties for the prior three tax years. You must also have filed all returns or an extension and paid or arranged to pay taxes due.
In 2020, the IRS abated $11.4 billion in civil penalties. So, penalty abatement is certainly worth a try for many taxpayers. [Source]
Reasonable Cause
You may also get penalty relief for a reasonable cause for your—for instance, if circumstances in your life your failure to file.
You’ll have to prove your case by providing information and supporting documentation. [Source]
Reasonable causes include:
- Death
- Serious illness
- Incapacity or unavoidable absence of the taxpayer or his or her immediate family
- Fire, natural disaster, or casualty experienced by the taxpayer
- The inability of the taxpayer to obtain necessary records
Offer in Compromise
Another tax relief option is an Offer in Compromise (OIC). Such an agreement negotiates tax liabilities for less than the full amount owed.
An OIC isn’t easy to get. The IRS will accept an OIC for only three reasons:
- You can’t afford the full amount. You may be eligible for an OIC if you don’t have the income or assets to afford the total tax debt owed before the 10-year statute of limitation ends.
- Economic hardship. You’ll have to prove that paying the full amount would cause you financial hardship.
- Doubt regarding the amount you owe. You may qualify for an OIC if there are doubts over the amount of tax debt you owe or whether you really owe it.
How to avoid IRS Penalties
Of course, it’s best to avoid IRS tax penalties altogether. Start with making sure you file your tax return on time. Make certain the date of the return is before April 15. Pay your unpaid taxes for the current tax year by the filing deadline.
Parent says, “The number one way to avoid penalties is to make sure you pay on time. Most penalties are a result of a tax balance due.” If you pay your tax return on time, that is, by April 15, you can avoid most of the headaches.
IRS Penalties tend to occur the most with self-employed individuals and those who file extensions.
“Self-employed taxpayers make the mistake of underestimating what they owe for income taxes because they don’t factor in the approximately 16% in tax liability for self-employment taxes,” says Parent.
People also think that filing an extension means they have extra time to pay. If you make a late payment after April 15, you will have penalties. You must pay with your extension when you submit IRS Form 4868. Otherwise, you’ll pay penalties, interest, and late fees. Extensions are six months.
According to Parent, the key is to pay as you go. “The IRS imposes most penalties when there is a balance due,” he says.
“For example, if you haven’t filed taxes in the past three years, yet you had wages withheld, you generally won’t get penalized. If you file late and are entitled to a refund, there will be no late filing penalties.”
Take IRS penalties seriously
The IRS can be aggressive in assessing and collecting tax penalties. “In 1955, there were 14 tax penalties provisions,” says Parent. “Now there are more than 140.”
Parent urges people to remember that the IRS is adversarial in nature. “While individual agents may be decent people, the system is brutal,” he says.
“The IRS penalty regime deserves tar and feathers. Always remember that IRS employees represent the government, not you.”
When to get a loan to pay the IRS
If you end up owing money on your tax return, it may make sense to borrow the funds to pay.
Before you apply for a loan, make sure you’re caught up filing your income tax return and paying the current year’s taxes.
Parent advises, “It makes no sense to pay off yesterday’s tax bill and penalties, just to get hit with underpayment penalties for this year. Millions of Americans on the IRS penalty treadmill have paid billions over the years that they wouldn’t have if they’d had a better strategy.”
How to get tax penalties waived
The good news is that there is relief for the tax penalty for late taxes. Here are ways to get tax penalties reduced or waived altogether.
For first-time infractions: Call the IRS
As simple as it sounds, the first step you should take is simply asking the IRS to waive your tax penalties. It may sound too good to be true, but if this is a first-time offense, your chances are good.
Before you call
Before hopping on the phone with the IRS, gather the following documentation and information:
- The IRS notice of your tax penalty.
- The tax return in question.
- Your social security number.
- Your filing status.
Also, make sure that you’ve filed all relevant tax returns. If you’re being penalized for a late tax return and you still haven’t filed the return when you call the IRS, you won’t get your penalty waived.
What to say
What do you do once the IRS agent picks up? First, let them know that you received a letter charging a tax penalty and that you’d like to have it waived.
Once they’ve verified your identity and confirmed the infraction, they’ll probably tell you that they can’t waive the penalty. Don’t be discouraged. Press on and ask if you can take advantage of “first-time penalty abatement.” Be sure to use those exact words! If it’s your first time incurring such a penalty, they should waive it.
However, you can only use this strategy once, so make sure it doesn’t happen again!
For clerical errors: Call the IRS
The same strategy also works if your tax penalty was made in error — for example, if the IRS made an arithmetic error. These situations are rare, but they happen. If the mistake happened on the IRS’ side, they will definitely waive the penalty.
For repeat offenses: Call in the big guns
If you’ve repeatedly incurred tax penalties for underpaying or filing late, it will be difficult to get the penalty waived. Your best chance is to enlist the aid of a tax relief professional.
A tax attorney can assist you with actions such as filing delinquent taxes, dealing with a tax lien, negotiating an offer in compromise, and releasing wage garnishments.
These trained experts know the ins and outs of tax law and are experienced in negotiating with the IRS. They will help give you your best shot at getting your tax penalties waived, or at least reduced. Here are our top picks for tax relief companies:
What if you can’t afford to pay?
If you can’t afford tax relief, there are a few organizations that might be of service.
Taxpayer Advocate Services (TAS) is an independent organization within the IRS that reports to the National Taxpayer Advocate. It was designed to assist taxpayers who are experiencing economic harm, such as an inability to provide daily necessities (i.e. housing, transportation, food). TAS offers taxpayers assistance in resolving IRS problems that they haven’t been able to resolve through normal channels.
The Office of Appeals is another taxpayer advocacy organization, which acts as an “informal administrative forum” to help with tax law disagreements. It is independent of the IRS in order to provide “fair and impartial” services, both to the taxpayer and the U.S. government.
If you need help and can’t afford a tax attorney, investigate these public resources.
How to get tax penalties reduced
If the IRS refused to waive your penalty, you’re not out of options. You can still reduce the damage that the penalties will do.
Set up an installment agreement
If you’re being penalized for unpaid taxes, call the IRS and ask to set up an installment agreement. What is an installment agreement? It’s a payment plan that lets you pay your overdue taxes in a series of monthly payments.
When you set up an installment plan with the IRS, they will cut your penalty in half. That means you’ll pay half as much interest on your debt.
Negotiate penalty abatement
If you have reasonable cause — in other words, an excuse that the IRS considers sound — for your tax infraction, they may reduce your penalty. Such reasons might include:
- A serious medical emergency.
- A death in the family.
- The inability to obtain records required to file your taxes (e.g. your employer never sent you some necessary forms).
If you failed to file or pay your taxes because of difficult life circumstances that rendered you unable to pay, you likely have reasonable cause. In these cases, it’s worth calling the IRS to negotiate a reduction of your penalties.
In both of these cases, it might be worth enlisting a trained tax professional to negotiate on your behalf. Tax professionals know the language which best appeals to IRS agents. And they know all of the legal loopholes which will let you get the best possible result.
Browse tax relief experts here.
Where should you start?
Not sure where to start? Calling the IRS and requesting that they waive your penalty is a great first step. If that fails, it may be time to enlist the aid of a great tax relief company. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. They can help you to negotiate with the IRS to get those penalties reduced or removed entirely.
You can get a tax relief loan for lower than 10% APR. The IRS determines interest rates every quarter. For taxpayers other than corporations, the rate is the federal short-term rate, plus 3 percentage points. The federal short-term rate is 6%, which puts the IRS rate at around 9% (source).
If you owe less than $50,000 on your tax return, you can pay via IRS Simplified Payment Plans that reduce accrued penalties. Some of the plans involve fees in addition to interest, so it pays to compare.
If you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. Check out which tax relief company is the best fit for you.
Other options include borrowing from a 401(k), family member, or a home equity line of credit. “Usually, those interest rates will beat the IRS,” says Parent.
The internal revenue services response to a late federal tax return and unpaid taxes is costly. Consider working with a top tax relief firm with tax attorneys on staff to ensure you’re heading down the right path.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.
