Every year, the IRS levies penalties amounting to billions of dollars. The IRS uses penalties to encourage compliance from taxpayers which seems to work well. You’ll understand why when you read more about their severity and onerous nature. The IRS also uses them very often which is why you might have arrived at this page after receiving one of the IRS penalty letters recently.

There are two common IRS penalties. If you have received an IRS penalty, it’s probably one of these.

  1. Failure to pay penalty
  2. Failure to file penalty

Failure to Pay Penalty

The Failure to Pay Penalty is what it sounds like, it’s a penalty imposed if you don’t pay taxes on time. This penalty is calculated based on how long your overdue taxes remain unpaid. The good news is the Failure to Pay penalty will not exceed 25% of your unpaid taxes. The bad news, it can be up to 25% of your taxes due. To be exact, the Failure to Pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. There are some other complicated rules with this penalty but this is the general idea. Now, the really bad news is that the IRS charges interest on penalties. This interest can increase the amount you owe until you pay your balance in full.

Failure to File Penalty

The Failure to File Penalty is imposed if you don’t file a tax return on time. The Failure to File penalty is a percentage of the taxes you didn’t pay on time. The good news is the same for this penalty; it won’t exceed 25% of your unpaid taxes. However, the bad (and very bad) news is the same as the Failure to Pay penalty. The bad news is this penalty can be up to 25% of your taxes due and there is interest charged on the penalty. The Failure to File Penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. There are some other complicated rules with calculating the penalty but this is the general idea.

Penalty Removal

There are ways to sometimes get the penalties removed (abated). If you work with an experienced CPA you’ll have a better chance to get some or all of the penalties removed. The CPA can file a Power of Attorney (POA) with the IRS to speak with them on your behalf. The CPA can also use the practitioner hotline to get in touch with IRS agents directly to try to negotiate how much penalties can be removed. It’s not a guarantee the CPA will be able to get them removed but it definitely increases your odds to work with someone experienced in having them removed.

The IRS penalties are very onerous and we highly recommend that you try to get them taken care of immediately. If not, the interest turns into an ever-increasing, burdensome snowball until the balance is paid in full. It’s definitely best to figure out how to stop that as soon as possible.