Posted by James Financial Services Inc

Abatement

Abatement

Usually, when taxpayers receive a notice and are assessed for penalties and interest related to federal income and informative tax returns, they tend to just pay them. Not so fast! If you are familiar with the federal system and share your notice and assessments with your tax professional, penalties can be reduced in many cases. However, interest rarely decreases, but let's take a look at the types of federal sanctions and how abatement can occur when a sanction is assessed through First-Time Penalty Abatement, Statutory Exception, or reasonable cause.

Below is an overview of the complex regulations for each type of assessment; Contact your tax adviser for specific cases you may encounter.

The most common assessments of federal tax penalties for individuals include:

  • Accuracy-related penalty

  • Delayed submission or failure to file income tax returns

  • Estimate of the penalty for non-payment or non-paying estimates

  • Late payment or non-payment of taxes due with the income tax return


Approved methods for requesting an Abatement

There is a legal exception to the imposition of sanctions. This happens when a taxpayer receives incorrect written advice directly from the IRS. If so, complete Form 843 to claim a penalty for documenting the false written statement you relied on and provided by the IRS. In the absence of a legal exception, the abatement of the fine only intervenes within the framework of the IRS program for the first time to reduce the fines or for a just cause.

The First Time Penalty Abatement (FTA) has been around for over 20 years and can be used by a qualified taxpayer to reduce penalties for no-show, non-payment, and non-payment of the bond. A taxpayer can claim the FTA for a single tax period (one fiscal year for personal and corporate income tax and one quarter for payroll tax). Eligible taxpayers must not have received other "significant amount" penalties for the same type of return in the past three years and must comply with all registration and payment requirements.

The IRS rewards taxpayers who normally serve a one-time penalty amnesty. While it is possible to apply for an FTA over the phone or through electronic services with the IRS, the most common method to request an FTA is in writing in response to an attached notification/assessment.

The Internal Revenue Service (IRS) provides a reasonable cause exemption from a penalty when the taxpayer exercises normal diligence and prudence in establishing his tax obligations but has not complied with these obligations. The taxpayer must clearly and concisely explain the facts and circumstances that led to the non-payment and how prudence and prudence were exercised in relation to handling their affairs during this time.

In addition, with the change of facts and circumstances, the taxpayer has tried to comply with tax requirements. Some typical situations include fires, casualties, or natural disasters; inability to obtain records; the taxpayer's death, illness, or disability; any other reason why you have used customary business care and prudence to comply with tax obligations. Generally, just cause compensation is requested in writing in response to an attached notification/assessment.


Common Assessments of Tax Penalties

Late or failure to file penalties occur when you file a return after the original due date plus valid extensions. For Forms 1040, 1041, 706, 709, and 1120, late payment penalties only appear when you owe a balance due on the return. If the return is in an overpayment/refund position, no penalty will apply.

Suppose an amount is due and not remitted on time, including valid extensions. In that case, the penalty applied is 5% of the monthly balance or a fraction of a month if the return is delayed within five months (maximum fine of 25% of taxes due). If the default is fraudulent, the penalty is 15% of the monthly tax due, up to a maximum of 75% of the amount due. Reducing the IRS penalty for the first time or reasonable cause can be used to reduce a late filing penalty.

For Form 1120S, if an amount expires and is not filed on time, including valid extensions, the penalty is $195 (indexed to annual inflation) multiplied by the number of shareholders during the l year. For a declaration due tax-free, the penalty will apply for each month or partial month of delay in the declaration up to a maximum of 12 months. If the tax is due, an additional penalty of 5% of the unpaid tax will be applied for each month or partial month of delay in the declaration, up to the limit of 25% of the unpaid tax.

For Form 1065, if an amount expires and is not completed on time, including valid extensions, the penalty is $195 (indexed to annual inflation) multiplied by the number of members for that year. The penalty applies to the company each month or partial month in which there is a delay in return, up to 12 months.

For the international information return and foreign bank statements and financial accounts, the IRS may impose a penalty of $10,000 for each non-payment during each applicable period, plus an additional $10,000 for each month in which it persists, up to a maximum of $60,000. The penalties associated with disclosing information abroad are very important, so discussing any potential disclosure of foreign income and assets is essential.

Late payment penalties arise when a refund is due and no tax or withholding tax of at least 90% of the current year's tax or 110% of the previous year's tax had been paid. The penalty is equal to 0.5% of the tax due and accumulates for each month or part of a month in which there is a balance due, up to a maximum of 25% of the tax due. Reducing the IRS penalty for the first time or reasonable cause can be used to reduce a late filing penalty.

Estimated penalties for non-payment occur when a taxpayer does not pay during the year the income tax created by withholding at source or estimated quarterly tax payments. This fine is shown in your tax return on Form 2210. There is a limited reduction in this fine, except for miscalculation. An annual income method is available to determine which penalties to use if income is not earned evenly throughout the year.

The IRS may impose an accuracy penalty if the service finds that a non-payment of tax can be attributed to negligence, that the tax understatement was material, or that it was a material misstatement in the valuation of a tax, an inheritance, or a gift. The penalty for precision is generally set at 20% of the tax paid and, in some cases, maybe increased. Reasonable cause is the only abatement method that can be challenged if a precision penalty is awarded.

Even if one of the penalties, as mentioned above, has been found and paid. You believe you qualify for the deduction, the taxpayer can still claim the refund using IRS Form 843 by sending it within three years of the expiration of the declaration of date of filing or two years from the date of payment of the sanction.

If you request an abatement of an assessed penalty using any of the methods described above and it is rejected, remember that you can challenge a penalty abatement determination by the IRS to allow a living person to hear their situation and make an informed decision.

Fortunately, as a taxpayer, you will never need to understand IRS penalties and the abatement process if you file and pay your taxes on time. But if you do, this summary can be kept for reference, and assist you in your unfortunate situation and allow you to understand IRS penalties and how to abate them before you pay for an assessment.


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