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  • Robert Nath

IRS Penalties

Updated: Mar 14, 2022

How does the IRS figure penalties?

The most common IRS penalties are:

  • Late filing of a tax return

  • Late payment of a tax

  • Failure to make federal tax deposits (employment taxes)

  • Late payment of estimated income taxes

The late filing penalty is calculated on the amount due but unpaid. For example, if you file an income tax return late, the law says you must pay 5% per month (up to 25%) of the “net amount due.” (So if there is no net amount due, there is no penalty.) The other common penalties are late payment (1/2% of the balance due per month at first, then increasing to 1%), estimated taxes,/ For businesses, the most common penalties are for failure to pay over the payroll taxes.

How can penalties be avoided or abated?

Generally, you must show “reasonable cause” and the absence of “willful neglect” in order to avoid or abate penalties. “Reasonable cause” and the absence of “willful neglect” are shown by a full presentation of all facts and circumstances. An example is a serious illness that prevented you from filing a tax return on time. Another might be a severe, unexpected cash flow crunch (such as from a natural disaster or terrorist attack). However, be aware that the Internal Revenue Manual and hundreds of cases have interpreted these phrases; the law on these standards is vast and daunting. Each type of penalty comes with its own standards that must be explicitly addressed, in detail.

Does the IRS charge interest on penalties? Yes. In fact, the law requires that interest be charged on tax, and on penalties, and on interest. This “interest on interest” feature arises because interest is compounded daily

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