IRS Tax Penalties & Interest: Common Tax Penalties Incurred

IRS Penalties and Interest Are Typically Caused By Estimated Tax Underpayments, Failing to Pay or File Taxes On Time

There are over one-hundred and forty tax penalties that the IRS can charge the taxpayer with only a few commonly used. The most common penalties are the Failure to File Penalty, Late Payment Penalty, the Penalty for Underpaying Estimated Taxes, the Substantial Understatement penalty, and the penalty for negligence or intentional disregard.

The IRS uses penalties to not only encourage compliance, but to create a fair tax code in the sense that taxpayers will be punished if they do not comply. In most cases, an IRS computer is assessing penalties. However, this does not mean that the penalties assessed are always justified. Even if the IRS is right, sometimes penalties and interest can be abated. Typically an IRS assessment letter, or an Examination Report (from an audit) will tell you how long and how much you owe including any amount for tax penalties and interest.

The IRS has penalties for many different things and the amounts of those penalties vary for each particular item. There are five basic categories for penalties. These five categories are:

• Accuracy Related Penalties
• Fraud Penalties
• Underpayment Penalties (Failure to Pay Taxes, Failing or Underpaying Estimated Taxes)
• Late Return or Failure To File Penalties
• Combined Penalties

Typically the most severe penalties are the fraud penalties. There are many different types of fraud penalties, but to give you an idea of how harsh this is, if you fraudulently underreported your income by $100,000, the IRS will fine you 75% of that underreported amount, so you total penalty will be $75,000, which will also include additional interest.

Reducing or Eliminating Penalties and Interest

One way to reduce penalties and interest is through IRS penalty abatement. Typically, with penalty abatement, you will be able to eliminate a good portion, if not all of the penalties, but not the interest, (known as Interest Abatement) if you can show reasonable cause. Eliminating these penalties may lift a huge financial burden off of your shoulders. Normally, penalties make up 25% of the total tax debt amount, but can be up to 90% of the total amount owed because of the large failure to file penalty and overall underpayment interest rates. If you would like a professional tax team on your side to help you abate penalties incurred, or you would like a complimentary consultation to understand how you can reduce or remove tax penalties, request a quote today.

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