The Internal Revenue Service (IRS) may levy fines on your tax account for various reasons. When you fail to pay the entire amount you owe on time, the IRS is obliged by law to impose interest. Penalties may also accumulate interest if not paid in a timely manner. Interest and any applicable penalties will continue to accumulate until your amount outstanding is paid in full.
Here are some of the most frequent fines, as well as details on why they were assessed and how to seek penalty abatement if appropriate.
When Are You Subject to IRS Penalties and Interest?
- Failure to file – When you fail to file your tax return by the due date or extended due date if an extension to file is sought and granted, it is considered failure to file.
- Failure to pay – When you do not pay all of the taxes stated on your tax return by the original tax return’s due date, it is considered failure to pay. An extension of time to file does not extend the time to pay; therefore, even if you sought an extension of time to submit your tax return, you must pay your taxes by the original due date of the tax return. Furthermore, if the IRS issues a notice and demand for payment and fails to pay on time, the IRS may assess a failure to pay the penalty.
- Failure to pay correctly estimated tax – When you don’t pay enough taxes due for the year with your quarterly estimated tax payments, or through withholding, when required, it is considered failure to pay correctly estimated tax.
- Bad check – When your bank refuses to accept your cheque or another form of payment, it is a bad check and you will have to make payment in another way.
Possible Scenarios That Could Result in IRS Penalties in 2021
This year, there are a handful of other situations that could result in IRS penalties. Here are two that you may experience:
I paid the IRS, but I still received a bill with penalty and interest costs. What should I do?
If you sent a payment to the IRS in 2021 on or before May 17, it might still be unopened owing to the COVID-19 mail backlog. For additional information, see the sections on “Received a Bill or Notice” and “Sent Us a Check”. The IRS will process your payment based on the date who received it. Don’t cancel your check, and make sure you have enough money on hand for when the IRS processes your payment.
I was charged a penalty and interest since I had not yet paid. What are my alternatives?
To begin, it is critical to realize that relevant penalties and interest will continue to accumulate until the account is paid in full, so the sooner you settle the amount, the more minor penalties and interest you will have to pay.
How to Appeal IRS Penalties
In the case that the pandemic or other circumstances impacted you financially and inhibited your ability to pay your taxes, the IRS might be able to eliminate or decrease certain fines for reasonable cause. Note, however, that this is only if you attempted to comply with the tax law but were unable to do so due to facts and circumstances beyond your control. If this applies to you and you have the required evidence, you may contact the toll-free number on your IRS notice or send a letter requesting penalty reduction due to reasonable cause.
What You Can Do to Avoid Penalties and Interest Fees
If your tax and penalty liability is decreased, the IRS will immediately lower the associated interest. The IRS does not waive or decrease interest for justification or as a first-time relief. Interest is required by law and will be levied until your tax account is paid in full.
The IRS may only decrease the amount of interest you owe if the interest results from an excessive mistake or delay on the part of an IRS officer or employee executing a ministerial or administrative function.
The IRS will continue to assess a failure-to-pay penalty of up to 25% or until the tax is paid in full, whichever comes first. In general, the IRS will not waive the failure-to-pay penalty until the underlying tax is fully paid. Keep in mind that if there is still an amount owed after the penalty has been eliminated, interest will continue to accumulate until the account is paid in full.
Personal income taxes can be complicated, which is why working alongside a professional is always ideal. However, we understand that despite the best intentions, circumstances far from ideal can arise. A tax resolution specialist can be a godsend in those moments as they can help you navigate the waters and resolve the issue before the fees accumulate.
Work with the best tax resolution specialist to avoid incurring any penalties and interest! At Axiom Tax Resolution Group, we will help you in any sticky situation and recommend a good course of action! Call us now to learn more.