There are several reasons why the IRS assesses tax filing penalties. Note that the IRS is legally bound, under Internal Revenue Code (IRC) § 6601, to charge interest when a tax filer fails to pay the full amount of tax due to the IRS on time. Additionally, the IRS is entitled to charge interest on assessed penalties. Interest and penalties will continue to accrue until the outstanding tax due, interest, and penalties are paid in full.
IRS Tax Filing Penalties
Following is a list of common IRS tax filing penalties and reasons for why the penalties are assessed.
Failure to File
This IRS tax penalty is assessed when the taxpayer does not file a tax return by the tax filing due date or extended due date if an extension to file taxes is requested and approved by the IRS.
Failure to Pay
This IRS tax penalty is assessed when the taxpayer does not pay the taxes reported on the tax filers tax return in full by the tax filing due date of the original tax return. An extension to file a tax return does not extend the time to pay taxes due, so the taxpayer must pay the tax amount owed by the original due date of the tax return even if an extension of time to file the tax return was requested. The IRS may also charge a failure to pay penalty if the IRS makes a notice and demand for payment of taxes owed and the taxpayer fails to pay the outstanding balance on time.
Failure to Pay Proper Estimated Tax
This IRS tax penalty is assessment when the taxpayer doesn’t pay enough taxes due for the year in quarterly estimated tax payments, or through withholding, when required.
The IRS will charge a penalty when the taxpayer’s bank does not honor a tax payment check or other form of payment for taxes due.
IRS Interest Charges
The IRS is required to charge interest on any unpaid balance of taxes owed until the outstanding taxes are paid in full. Following are situations in which the taxpayer may receive a penalty and interest charges.
1. “I sent a payment to the IRS, but I still got a bill with penalty and interest charges. What can I do?”
If the taxpayer mailed a payment in 2021 to the IRS on or before May 17th, the payment may still be unopened in the backlog of mail the IRS is processing due to COVID-19. The IRS will process the tax payment with the date the IRS received it. Do not cancel the tax payment check and make sure funds are available for when the IRS processes the tax payment.
2. “I received penalty and interest charges because I did not pay yet. What are my options?”
It is important to understand that applicable IRS penalties and interest will continue to accrue until all tax owed is paid in full. The sooner the outstanding balance is paid, the less the taxpayer will have to pay in penalties and interest.
3. “How can I dispute IRS penalties?”
If the cause of the IRS violation was a result of the pandemic or other circumstances, the IRS may be able to remove or reduce some penalties due to reasonable cause, but only if the taxpayer attempted to comply with the tax law but were unable to due to facts and circumstances beyond their control. The taxpayer will need to provide necessary documentation to support the compliance claim, and they can call the IRS or submit a letter to request penalty relief due to reasonable cause. The IRS will also consider an Administrative Waiver or Statutory Exception for waiving penalties.
If the IRS rejects a request to remove a penalty, the taxpayer may be able to request a conference or hearing with the IRS Independent Office of Appeals. The taxpayer has 30 days from the date of the rejection letter to file a request for an appeal.
If any tax or penalties are reduced, the IRS will also automatically reduce related interest. Interest is charged by law and will continue to accrue until the tax account is fully paid. The IRS may only reduce the amount of interest owed if the interest is due to an unreasonable error or delay by an IRS officer or employee.
The IRS has created the IRS Operational Status page, including a section on Answered a Letter or Notice, for more details on delays due to the pandemic and other tax news. However, even if the IRS takes a bit longer to address
a request, if granted, all applicable penalties and associated interest will be removed as appropriate.
Understanding IRS tax rules and regulations are critical to avoid tax penalties and related interest charges. This list includes some situations in which a taxpayer may incur penalties and interest, and how to appeal charges. To learn more about tax filing requirements and representation in the event that tax penalties and interest are assessed, contact U.S. Taxes, Inc. at firstname.lastname@example.org or 1-609-588-8181.