Dealing with tax debt is stressful, but the penalties that come with it can make the situation even worse. If you’ve received a tax bill from the IRS with substantial penalties added, there are ways to address these charges. Here, we’ll delve into why IRS penalties are assessed and how you can manage them.
Why Did the IRS Charge Penalties?
Once the IRS determines you have an unpaid tax balance, penalties and interest start accruing and will continue to do so until the balance is fully paid.
How Are Penalties Calculated?
Penalties and interest are often added due to late payment or late filing:
- Late Payment: A penalty of 0.5% per month is assessed from the due date of the return until the debt is paid or reaches 25%. This increases to 1% ten days after a Final Notice of Intent to Levy is issued. If the return was filed on time, the penalty decreases to 0.25% while the debt is under an Installment Agreement.
- Late Filing: A penalty of 5% of the tax due is assessed each month for up to five months. As of 2008, the minimum late filing penalty is $135 or 100% of the tax due, whichever is smaller.
- Interest: The IRS interest rate is the federal short-term rate plus 3%, compounded daily.
These penalties and interest can add up quickly, making it difficult to escape tax debt.
Can You Dispute Tax Penalties?
You can dispute penalties through a Penalty Abatement request if you have a reasonable cause. This involves explaining to the IRS the circumstances that led to your tax debt and requesting a reduction or removal of penalties.
Be cautious of claims that the IRS will waive all penalties and interest; such promises are often unreliable. However, there are options to dispute penalties. Typically, interest is non-negotiable unless very specific conditions are met.
What Can You Do to Address This?
If you qualify, one option is to submit an Offer in Compromise, attempting to settle your tax debt for a lower amount. While this doesn’t directly waive penalties or interest, it can lead to a tax settlement.
Another method is to pay your total debt, including penalties, through an Installment Agreement with the IRS, allowing you to make manageable payments over time.