The IRS can impose various penalties for taxpayers related to late payment, late filing, inaccurate returns, etc. Many of these penalties can be abated due to reasonable cause.
What is a late payment penalty and how can it be removed?
A late payment penalty accrues at .5% per month for each month your balance remains unpaid. The maximum penalty that can be imposed is 25%. The penalty of .5% is on your outstanding tax balance and will continue to accrue until your balance is paid in full. This penalty can be removed if you show reasonable cause and not willful neglect when it came to the failure to timely pay your taxes. However, it is best if you wait to make this request until you are almost finished paying the tax since the federal government will most likely only grant the removal of the late payment penalties once.
What is a late filing penalty and how can it be removed?
The late filing penalty is more significant than the late payment penalty. The late filing penalty is 5% per month for each month your return is not filed. The maximum penalty that can be imposed is also 25%. For example, you will incur a 25% penalty once your file return 5 or more months late. Compared to the late payment penalty, it is visibly significant. You can request penalty abatement if you can show reasonable cause and not willful neglect when it comes to the late filing of your return. The IRS takes the filing obligation and deadline very seriously so this is a very difficult penalty to get removed.
What is the accuracy-related penalty?
The accuracy-related penalty is approximately 20% on your additional tax assessment. The accuracy related penalty arises when you were audited by the IRS and they imposed an additional tax assessment due to an adjustment on income, expenses, deductions or credits. If your additional tax liability is under $5,000, then it is fairly easy for this penalty to be removed. (One of the reasons the IRS will impose this tax is if you have a substantial understatement of tax.) If you owe less than $5,000 then the IRS states that this is not substantial pursuant to its statute. However, if there is a substantial understatement of tax, then you will most likely have to show reasonable cause and good faith when it came to the preparation of your tax return. If you had good reason to take a certain expense, deduction, etc., then most likely this penalty can be removed.