The IRS imposes penalties to discourage noncompliance. The late filing assessment is 5% of the unpaid balance for each month or partial month the return is late, up to a maximum of 25%; if the return is more than 60 days late, the minimum penalty is the smaller of $135 or the tax due. The IRS also imposes penalties if all taxes are not paid by the tax return due date. The late payment assessment is 0.5% of the unpaid balance for each month or partial month the unpaid amount is late, up to a maximum of 25%.
These penalties build up quickly and can become oppressive for the taxpayer. The good news is the IRS initiated a first-time penalty abatement program called First Time Abate (“FTA”) in 2001 with the intention of boosting collections.
The bad news is the IRS has done a poor job of making taxpayers aware of FTA. The Treasury Inspector General for Tax Administration (“TIGTA”) recently published their findings on this program; it wasn’t very positive. In 2010, only 8.8% of 1.65 million individual taxpayers qualifying for FTA relief actually received the abatement! Why? Because most taxpayers and tax professionals don’t know FTA exists. TIGTA pointed out that the IRS does not mention FTA relief in the 1040 instructions, in a search of its website, its publication “Eight Facts on Penalties”, or on balance due notices sent to taxpayers.
So what is FTA? The IRS can waive both late filing penalties and late payment penalties under either of two scenarios:
- The taxpayer has demonstrated full compliance for the three prior years. Reasonable cause does not have to be shown. OR
- The taxpayer can show they exercised ordinary care and prudence. The failure to file and/or pay on time was due to reasonable cause and not because of willful neglect.
The penalty abatement is not automatic; it must be requested.
The TIGTA made recommendations to increase awareness of FTA and make the waiver more advantageous for taxpayers. In response to the report, the IRS plans to study how best to use FTA as a compliance tool.
The best way to stay in compliance is to file tax returns correctly, on time, and with full payment when required. Should you be assessed late filing or late payment penalties, you may have remedies even most professionals don’t know about. Gary Kaplan is committed to staying informed on tax issues that advocate your rights and interests. Call Gary with your tax questions today.
