Understanding IRS Penalty Abatement: What Penalties Can Be Waived?

Tax time can be stressful, and for many, the fear of facing penalties looms large. However, there is a glimmer of hope for those who find themselves on the wrong side of IRS penalties. The IRS offers a first-time penalty abatement program, providing relief for certain penalties incurred by taxpayers. Understanding which penalties can be waived through this abatement can provide much-needed relief for individuals and businesses alike.

Failure-To-File Penalty:

One of the most common penalties taxpayers face is the failure-to-file penalty. This penalty is levied when individuals, S corporations, or partnerships fail to submit their tax returns by the designated deadline. For individuals, the penalty typically amounts to a percentage of the unpaid taxes, not exceeding 25%. However, it’s important to note that interest will continue to accrue on any unpaid tax amount.

For partnerships or S corporations, the penalty calculation is slightly different. The IRS determines the penalty based on the number of shareholders or partners associated with the entity during the tax year. In the case of the 2023 tax year, S corporations and partnerships face a late filing penalty of $220 per shareholder or partner, with a maximum penalty duration of 12 months.

Failure-To-Pay Penalty:

Another penalty that may be eligible for abatement is the failure-to-pay penalty. This penalty is incurred when taxpayers fail to pay their taxes by the due date specified by the IRS. The penalty is assessed as a percentage of the unpaid taxes, not exceeding 25% of the total amount owed. Similar to the failure-to-file penalty, interest will continue to accrue on any outstanding tax balance.

However, if taxpayers are penalized for both failure-to-file and failure-to-pay in the same month, there is a provision for reduction. The IRS will reduce the failure-to-file penalty by an amount equal to the failure-to-pay penalty for that month.

Failure-To-Deposit Penalty:

Employers are subject to the failure-to-deposit penalty if they fail to remit employment tax deposits in a timely manner. These deposits typically include federal income tax withholding, Social Security, Medicare, and unemployment taxes. The penalty may also be imposed if the employer fails to deposit the correct amount or deposits taxes incorrectly.

The amount of the failure-to-deposit penalty varies and is calculated based on the percentage of taxes that were deposited improperly.

First-Time Penalty Relief:

It’s important to note that the IRS provides first-time penalty relief for the aforementioned penalties under certain circumstances. Taxpayers who have a clean compliance history and meet the eligibility criteria may qualify for penalty abatement. However, it’s crucial to apply for relief promptly and provide appropriate documentation to support the request.

In conclusion:

while IRS penalties can be daunting, there is recourse available through the first-time penalty abatement program. Understanding which penalties may be waived and the eligibility criteria for relief can help taxpayers navigate the process effectively. By taking proactive steps and seeking assistance when needed, individuals and businesses can mitigate the financial burden of IRS penalties and stay on the path to compliance.

We only serve as a resource website and do not offer personalized tax assistance. If you’re experiencing difficulty resolving the problem independently and require assistance, it is advisable to consult with a qualified tax professional. For personalized assistance, we suggest locating a tax professional by Click Here.