There is a simple way to reduce your tax debt. Do you want to know what it is?
Drum roll please. . .request the IRS to reduce your penalties.
Yes, that it is. No, it is not applicable all the time, but for certain penalties and under certain scenarios, it works pretty well. It actually applies more often than you think.
However, before we go into the how. Let’s learn a bit about the type of tax penalties we can ask the IRS to abate (i.e., get rid of).
The most common penalties to which this applies to are: 1) penalty for filing late and 2) penalty for paying late.
- Penalty for late filing. This penalty, as the name references, is for failing to file your tax return on or before the due date (usually April 15), or if you ask for an extension, on or before the extended due date (usually October 15). If you filed your tax return more than 60 days after the due date or extended due date, the minimum penalty is $205, or if you owe less than $205, 100 percent of the unpaid tax. Otherwise, the penalty can be as much as 5 percent of the unpaid taxes each month up to a maximum of 25 percent.
- Penalty for late payment. This penalty is for failure to pay the taxes owed on the due date, usually April 15. (Please note that there is no extension to pay taxes owed; only for filing the tax return.) The penalty is generally 0.5 percent of your unpaid taxes per month.
It can build up to as much as 25 percent of the unpaid taxes. These penalties can add up fast. And to add insult to injury, the interest accrues on top of penalties.
Now that you know a bit about the two common penalties that can be reduced and the cost of not taking any action; let’s talk about how we can get rid of them. And slash your tax debt in the process.
You may qualify for the IRS to reduce your penalties if you meet one of the following:
- Reasonable Cause
- First-Time Penalty Abatement
- Statutory Exception
No penalty if there is a reasonable cause. You will not have to pay a failure-to- file or failure- to-pay penalty if you can show the IRS there was a reasonable cause for not filing or paying on time.
No penalty for first-time penalty. Penalties will most likely be removed if:
- You didn’t previously have to file a return, or you have no penalties for the three tax years prior to the tax year in which you received a penalty.
- You filed all currently required returns or filed an extension of time to file.
- You have paid, or arranged to pay, any tax due.
No penalties for statutory exception. Tax legislation may provide an exception to a penalty.Specific statutory exceptions can be found in the penalty-related sections of the internal revenue code. One of these statutory exceptions is if you received incorrect written advice from the IRS.
If you did, you may qualify for a statutory exception. This is a rare one, but it is out there. So if you have been assessed penalties for late filing or late payment by the IRS, go ahead and ask for a penalty abatement if you think you fit into one of the exemptions listed above.
Now let me warn you. You may not always get your penalties reduced on the first try. Sometimes the IRS may not remove the penalties, even though, you qualify for one of the exemptions. If that happens don’t fret you may still have a second chance. If you received a notice or letter stating the IRS didn’t grant your request for penalty relief, you may want to appeal. You can send a letter to the IRS or use the Penalty Appeal Online Self-help Tool found on the IRS website.
And as a bonus, if any of your penalties are reduced, the IRS will automatically reduce the related interest.
So go ahead and write that letter to the IRS to see if you can get your penalties reduce and your tax liability slashed. To do this you can use Notice 746 and Form 843. These forms can be found in the IRS website.