The only things worse than tax debt are the penalties that can accrue on top of it. You may have received a tax bill from the IRS with some outrageous additional penalties tacked on. But there are ways to address these.
Let’s examine in detail why IRS penalties are assessed and what can be done to take care of them.
WHY DID THE IRS CHARGE PENALTIES?
Once the IRS establishes that there is an unpaid balance due, penalties and interest begin to build up and continue to accrue throughout the collection process for as long as the balance exists.
HOW ARE THEY CALCULATED?
Many individuals with tax debt may have penalties and interest added as a result of either late payment or late filing.
- Late Payment – 0.5% will be assessed per month from the return’s due date until the debt is paid in full or it reaches 25%. The 0.5% increases to 1% ten days after a Final Notice of Intent to Levy is issued. If the return was filed timely, the 0.5% falls to 0.25% during the time the debt is on an Installment Agreement.
- Late Filing – 5% of the tax due will be assessed each month up to five months. In 2008, the minimum late filing penalty was increased to $135, or 100% of the tax due.
- Interest – The IRS interest rate changes. It’s composed of the federal short-term rate plus an additional 3%, and it compounds daily.
Even though these numbers may seem confusing, it is important to remember that penalties and interest are aggressive, and they add up quickly, making it extremely difficult to get out of debt.
CAN YOU DISPUTE TAX PENALTIES?
You can dispute penalties and interest assessed through a Penalty Abatement request based on reasonable cause. In short, you will be asked to tell the IRS your story, including the circumstances leading up to and during the tax debt accrual, and request a reduction or removal of penalties.
Be extremely cautious of any promises or barstool testimonials that the IRS will waive all penalties and interest. However, with that said, there are several options to dispute penalties with the IRS. Typically, interest is non-negotiable unless some very specific terms are met.
WHAT CAN YOU DO TO ADDRESS THIS?
One resolution option, if you qualify, is to submit an Offer in Compromise to the IRS and attempt to settle the debt for a lower amount. While this does not result in an actual waiver or reduction of penalties or interest, it is an opportunity to petition the IRS for what is essentially a tax settlement. Another method is paying your total debt, including the penalties, in manageable payments, through an Installment Agreement with the IRS.
If you are interested in learning more about the details of an Installment Agreement or an Offer in Compromise, download our free guide, which details some of the newer programs the IRS has implemented to help taxpayers resolve their debt.
Ultimately, resolving IRS penalties can be a tricky scenario to navigate. Consulting a tax debt professional prior to establishing your strategy will be extremely beneficial. Contact us for a free consultation to discuss your specific situation. We can help you stop worrying about tax debt, so you can get back to your life.