Ways to deal with and minimize common IRS tax penalties

For those who owe taxes, seeking an extension of the time to file may not avoid all penalties. While avoiding a failure-to-file penalty, a failure-to-pay penalty may still accrue. In some cases, however, IRS penalty relief is available.

Two basic penalties can easily increase what you already owe the IRS. Filing late results in a penalty of 5 percent of the unpaid tax burden for each month the tax return is late. This penalty caps out at 25 percent after five months. The penalty for failing to pay your full tax bill before April 15 is .5 percent on the unpaid tax obligation for each month or part of a month that the payment is late.

On the other side, these penalties do not apply to a taxpayer who owes no tax or is entitled to a refund. A return must be filed within three year to receive a refund though.

Ways to avoid penalties or seek relief following difficult circumstances

When forms do not arrive at a new address or if the company busy season coincides with tax season, it may make sense to request a six-month filing extension. To avoid a late payment penalty a taxpayer can pay at least 90 percent of the tax obligation along with the request for an extension. The remaining balance must be paid by the extended due date.

If a tax bill is much larger than expected, a taxpayer may not have the money available to pay the total due. In these cases, filing the return before the deadline will avoid the late filing penalty. Several options exist in these circumstances:

  • Installment agreements allow a taxpayer to make monthly payments over a longer period.
  • Offer in Compromise can be used to settle for less than owed, but is only available in limited circumstances.

Another avenue for penalty relief is through the agency's First Time Abate policy. The FTA policy is available in cases where a taxpayer's history demonstrates he or she has filed on time and made required payments.

The last way to avoid a penalty is to prove that a reasonable cause existed to justify the late filing or payment. Any request to abate tax penalties based on reasonable cause is review on the individual facts. A sudden incapacitating medical emergency could provide a basis, but the standard is quite high and this relief generally only applies in extraordinary circumstances.

When faced with concerns over a large tax burden and mounting penalties, contact an experienced tax attorney to learn about possible remedies. The assistance of a lawyer can ensure you apply for the right type of relief and meet all procedural requirements.