CARL WATTS & ASSOCIATES

September 09, 2013

www.carlwatts.com
office@carlwatts.com
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Every year, way before tax time, all kind of announcements and articles throughout the mass-media urge you to file and pay your income taxes in due time, and warn you about the penalties and interest you’d have to pay for late filing and late payment.

Here is a brief reminder of the IRS rules regarding penalties and interest for late filing/payment of your taxes.


The failure-to-file penalty (also known as the delinquency penalty) runs at the rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you file an extension for your filing due date, you are not filing late unless you miss the extended due date. The failure-to-file penalty is based on the amount required to be shown on the return, and not just the amount shown as due.

The failure-to-pay penalty runs at 0.5% for each month (or part of a month) the payment is late. There is no maximum limit on the amount or continuation of failure-to-pay penalties. The penalty will continue to grow and accrue until the tax debt is totally satisfied.


The failure-to-pay penalty is based on the amount shown as due on the return (less credits for amounts already paid, e.g., via withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be lower, the penalty is based on the lower amount. In effect, there is no future "risk" with respect to this penalty.


If the 0.5% failure to pay penalty and the failure to file penalty both apply, the failure to file penalty drops to 4.5% per month so the total combined penalty remains at 5%. The maximum combined penalty for the first five months is 25%. Thereafter the failure-to-pay penalty can continue at o.5% per month for 45 more months (an additional 22.5%). Thus, the combined penalties can reach a total of 47.5% over time.


Interest rates are calculated based on the amount of unpaid taxes and penalties assessed. The IRS sets quarterly, variable interest rates for unpaid taxes. Interest is also assessed on penalties.


So, the results can be cumulative and significant. However, the IRS sets a 25% maximum on interest on unpaid taxes, penalties and corresponding interest assessments.

Now, after this fresh reminder of the rules, the question on everybody’s mind is: what is a rule if there are no exceptions to it? Well, rest assured, there are exceptions to these rules as well, and below you will see how and under what circumstances you can get out of paying the IRS tax penalties and interest.

A program created in 2001 entitled First-Time Abate (FTA) is on your side and dictates that if you have been in full compliance for more than three years, the IRS should waive any penalties for missed payments.

The IRS recently updated policy to modify its FTA policy for penalty relief. This type of penalty removal for taxpayers is a one-time consideration available only for a first-time penalty charge and based on taxpayers’ compliance history.

According to policy, the FTA penalty relief option for failure to file, failure to pay and failure to deposit penalties, under certain conditions, does not apply if the taxpayer has not filed all returns and paid, or arranged to pay, all tax currently due. For example, the taxpayer is considered current if they have an open installment agreement and are current with their installment payments.

When you use the FTA program you must maintain a clean record for another three years. If you get penalty abatement for reasonable cause, you needn’t worry about the three year limitation and can use the FTA program in a subsequent year.

According to the IRS, apart from the FTA program, relief from penalties generally falls into four separate categories:

  • Reasonable cause;
  • Statutory exceptions;
  • Administrative waivers;
  • Correction of Service error.

Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations.

To qualify for an abatement of penalties due to reasonable cause, you must have an excuse that indicates you had no control over the matter.

The IRS and Tax
Penalties Relief
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For example, if you suddenly became unemployed, lost your home, or suffered physical or mental health problems including depression, addiction, or alcoholism, your spouse left you and substantially reduced your income, then you have valid reasons for not being able to pay your tax bill.

Reasonable cause may also include a natural disaster, fire, casualty, or other disturbance, inability to obtain records, overseas travel and military service.

Penalty relief due to statutory exceptions are specifically referred to in the tax legislation.


The most common and recognizable statutory exception would be in the case of federally declared disasters and emergency areas. A statutory exception allows abatement because of a law which applies to federal tax returns filed during a tax period.

Closely associated with statutory exceptions, relief from penalties can result from an administrative waiver.

Administrative waivers are commonly issued when there is a delay in IRS printing and mailing forms or publishing guidance as to a particular tax issue, which would be issued through an official IRS notice. Administrative waivers for penalty relief can also include undue hardships suffered by the taxpayer and erroneous written and/or oral advice from the IRS, which would be applied to a taxpayer’s specific circumstances.

The final category of penalty relief is Correction of Service Error. The federal government concedes that the IRS does at times make mistakes when assessing penalties and will waive all penalties that result from errors.
Common examples include computer programming errors, a math error when an IRS employee manually assesses the penalty, the physical receipt of a taxpayer extension application that does not post onto the computer system, and any other error if a taxpayer can provide sufficient proof to the IRS that he is fully compliant. This may include a taxpayer who retains a shipping record for a parcel that does not ultimately reach the IRS or providing a canceled check to show that the return was timely filed.

You will have to complete IRS Form 843, Claim for Refund and Request for Abatement, to request that the penalties added to your account be waived.


Abatements generally are not approved until the tax owed is paid in full. Include a detailed account of the circumstances that created the infraction that resulted in the penalty in the “Explanation” section of Form 843. If you require more room, then attach a letter of explanation to Form 843. If you received an IRS notice in the mail regarding your penalty, follow the instructions outlined in the notice you received.

Another option is to call the IRS at 800-829-1040 to request that the penalties assessed on your unpaid tax be removed. The IRS customer service representative will ask for your name, date of birth, filing status, address and Social Security number for verification purposes. The representative then will proceed to ask you a series of questions, the answers to which will be used to determine whether or not you are eligible to have your penalties waived.

Complete IRS Form 2210 if you are requesting a penalty removal that resulted from an underpayment of estimated tax. Check box A to request a waiver of the entire penalty or check box B to request a partial abatement.

Interest may be excused in the case of ministerial or managerial error. Ministerial means that they lost the file, it fell through the cracks. Managerial means your case was delayed for some good reason on their part and you shouldn't have to bear the burden.

The general rule of thumb for penalty abatement to be accepted is whether or not the events that prevented the taxpayer from being compliant with tax laws were beyond their control. After you have determined you are a likely candidate to receive this type of relief, please follow the detailed filing instructions for this type of relief.


Most requests for penalty abatement are refused due to incomplete documentation to support the taxpayer cause, therefore It is recommended that you work with a tax professional or tax relief service that specializes in helping individuals achieve penalty abatement.