The IRS might have a reputation of being a scary, massive tax collection agency, but that is not the entire truth. Although it will take action to collect the taxes owed, it also has many programs in place to assist taxpayers in repaying their federal tax debt and becoming compliant. One of those is known as Penalty Abatement. With this program, you can get any late filing or late payment penalty fees removed from your tax debt.
Does it help? Let’s find out.
What Is Penalty Abatement?
Before we go too far into the calculations of how it saves you money, let’s first review what this program is. Penalty Abatement removes the penalty fees on your taxes. When you do not file your tax return, you are hit with a 5 percent per month or partial month penalty fee, which maxes out at 25 percent. If you do not pay your tax return, then you have to pay a 0.5 percent per month or partial month penalty fee, which also maxes out at 25 percent. If you do not file and do not pay, then you will be liable for a total of 5 percent of your taxes (4.5 percent for failing to file and 0.5 for failing to pay), which can add up to a maximum of 47.5 percent of your tax. If you pay more than 60 days late, then you have a minimum penalty fee of $205 or 100 percent of your tax, whichever is smaller.
There are three main criteria for Penalty Abatement:
- Reasonable Cause
- First Time Penalty Abatement and Administrative Waiver
- Statutory Exception
Reasonable cause is just as the name suggests. You must have a really good reason for not being able to file or pay your taxes on time that is not simply you forgot or did not have the money to pay. This might be that you were injured or severely ill, there was a fire at your home, you were affected by a natural disaster, someone close to you died or a similar circumstance. This is a little open-ended, but you do have to prove that you “used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.”
If this is the first time you have missed a tax filing or payment deadline, or if you have no penalties for the previous three years, then you might qualify for Penalty Abatement using the First Time Penalty Abatement protocol. However, you must be compliant and on all other taxes and have paid your taxes, or have arranged a payment plan. You might also qualify for administrative relief if an IRS agent provided you with incorrect oral advice.
The final type of Penalty Abatement is known as Statutory Exemption. This occurs when you received incorrect advice in writing from the IRS.
How Much Can You Really Save?
The amount of money you can save with Penalty Abatement depends on how much money you owe to the IRS, since that is the number on which all fees are calculated. Let’s do some calculations to show you how a Penalty Abatement can save you money.
Let’s start on the lower end of the spectrum. Let’s say that you owe the IRS $100, but you did not pay or file for 3 months. The IRS will charge you 5 percent per month or partial month for not filing and not paying. Because you are more than 60 days late, you also qualify for a minimum penalty fee for failure to file. For failure to file, you would be subject to a 5 percent penalty fee, but since you were also penalized for failure to pay, that reduces to 4.5 percent. This calculates to $13.50. However, you must pay the minimum penalty, so that becomes $100. Then, you also must pay the failure to file penalty of 0.5 percent, which $3.50. So, the total in penalties you pay is $103.50, making your total tax debt $203.50, not including interest charges. If you successfully qualify for penalty abatement, that means you save $103.50.
That might not seem like a lot, depending on your income status. However, let’s look at the same situation but with a tax liability of $10,000. This means you owe an additional $1,350 for failing to file and $150 for failure to pay, which is a total of $1500, or 5 percent of your total tax. You are still more than 60 days late, but you owe more than the minimum penalty. This means you could save as much as $1500 through a successful application for penalty abatement.
The longer you go without paying your tax debt, the more penalty fees you might accrue. For example, if you went the full five months without paying or filing your tax return and you originally owed $10,000, then you would accrue $4,750 in penalty fees, not to mention any added interest. For many, the penalty fees make a huge difference in their ability to pay.
One important note about Penalty Abatement is that it does not affect the interest that accrues on your unpaid taxes. This is 3 percent plus the federal exchange rate. It compounds daily and remains until you have paid your taxes in full. Although paying down your tax debt or removing the penalty fees reduces the interest you owe, there are very few instances in which your interest fees are completely removed from your tax bill.
Does It Really Help?
So, does Penalty Abatement really make a difference? It sure does. The extent to which it helps depends on your tax liability, the length of time that has passed since your tax due date and your ability to pay. However, for most people, Penalty Abatement becomes a major help with making it easier to pay their federal tax debt. Whether you only save $100 or you save $5,000 or more, this could be the difference between compliance and continued inability to pay.
Do you think that Penalty Abatement could help you, or do you want to see what other options you might have for reducing your tax debt? Contact Fidelity Tax Relief at 877-372-2520 to discuss your situation with our tax professionals. They will help you to find the best tax relief program for your circumstances.