When you owe money to the IRS, it can quickly become an overwhelming amount once you add the penalty charges and interest. For many people, it is the interest and penalties that make it so that they cannot afford to pay off their tax debt. If this is you, then you may be able to remove your interest and penalty charges so that you only have to pay your original taxes.
How the IRS Calculates Interest and Penalties
The IRS calculates the interest rate by adding 3 percent to the Federal short-term rate. Currently, the interest rate is at 3 percent, but it is re-calculated every quarter. The penalty fees are more complicated since they depend on several factors. There are two different penalties: failure to file and failure to pay. The failure-to-file penalty is higher and will typically be 5 percent of your unpaid taxes, but it will not go over 25 percent. After 60 days from the due date, the minimum amount you will pay in penalty fees for non-filing is $135 or 100 percent of your unpaid taxes.
If you do not pay on time, then you will have a 0.5 percent penalty charge each month, up to 25 percent. This may increase to 1 percent once the IRS has started collective action. If you did not file and did not pay, then you will just have the 5 percent penalty charge per month. The most that you will be charged in penalties is 47.5 percent of your unpaid tax, added to your original amount, if you do not file or pay.
The IRS does have a program in place for qualified taxpayers to remove the penalty, known as Penalty Abatement. The main condition for penalty abatement is that you have reasonable cause for not being able to file and/or pay your taxes by the deadline. This may include:
- Recent death of a very close relative or loved one
- A natural disaster
- Serious illness, disability, or injury causing an inability to complete your taxes (e.g. hospitalization or cancer)
- Poor advice on your taxes from a professional or IRS agent, with proof
- Inability to file for a reason beyond the control of the taxpayer (e.g. rehab or prison)
- Inability to gather records for a reason beyond the control of the taxpayer
- Freezes or other impairment to bank accounts due to civil disturbance, such as divorce
- An error occurred, but you can prove it was done with “ordinary business care and prudence”
- Other reasons for which you can prove that you “exercised ordinary business care and prudence” to complete your taxes but were unable to do so
When you apply for penalty abatement, you must have evidence to demonstrate that it was beyond your control, that you did not simply put off filing or paying your taxes because you could not pay or forgot, and that it was not an action of willful neglect. Through this program, you can apply for all or part of your penalty fees to be removed. This does not always apply to your interest, but it some cases it may. The IRS reviews Penalty Abatement on a case-by-case basis.
First Time Penalty Abatement
The IRS is more lenient on those who have never been late on filing or paying their taxes. In fact, there is a special program known as the First Time Penalty Abatement policy, which may remove some or all of your penalties if you have no history of late or no filing, you have no penalties for at least 3 tax years previous to the year for which you owe penalty fees, and you are currently otherwise compliant on your taxes.
File Your Old Returns
Another way to remove some or all of your penalty fees and interest on your back taxes is to file the return for any years for which you have not filed. When you do not file a return, the IRS files something for you are known as a substitute for return without giving you any deductions or credits beyond the standard deduction for your filing status. This typically leads to you owing a much higher tax than you might if you were to file a return yourself. Penalty fees and interest are calculated using the tax you owe to the IRS; therefore, if you reduce the amount of tax you owe, you also reduce the amount of interest and/or penalty fees added to your tax debt. Many people find they actually are owed a refund from the IRS.
Offer in Compromise
You may also qualify for another IRS tax relief program known as an Offer in Compromise. In this scenario, you offer an amount much lower than the tax you currently owe, which typically will also remove any penalty fees and interest. The IRS accepts your offer, you pay it, and the rest of your debt is forgiven. You do have to remain compliant on your taxes for the next 5 years and not miss any payments. An Offer in Compromise is the tax debt settlement program with the toughest criteria, which means that there is a chance your offer may not be approved.
If you owe a significant tax debt and cannot pay it, you do have options for finding ways to be able to settle your debt and get back in compliance with the IRS. For many, removing the penalty and interest fees makes their debt more affordable. If you still struggle with paying your debt, there are other tax relief programs with the IRS that may be right for your situation, such as an Offer in Compromise or Installment Agreement. The tax professionals at Fidelity Tax Relief are here to help you deal with your federal tax debt. Call us at 877-372-2520 today.