Tax Debt Penalties and What You Can Do About Them

Even for those taxpayers who are incredibly cautious in their filing procedures, mistakes happen all the time. Some people forget to report additional income, erroneously take credits or deductions, or simply make miscalculations in arithmetic. Whatever the scenario, any one of these missteps can ultimately lead to a tax debt.

An unfortunate side effect of owing a debt to the IRS is the amount you're charged in penalties. In addition to interest for non-payment, the government often tacks on additional fines. Depending on the circumstances of your debt, you could be liable for a variety of penalties from late filing to late payment fees. The IRS provides an explanation of any penalty you might be assessed (there are over 100 of them) on their website, IRS.gov. What you probably didn't know was that many of the penalties you face can be disputed and, in some cases, removed.

Typically, a taxpayer's situation must meet specific qualifications before penalty removal, also known as penalty abatement. Abatement is granted to taxpayers that can show that events beyond their control prevented them performing the full extent of their tax responsibilities. This includes death or illness in the taxpayer's immediate family, natural disaster, inability to obtain records, bad advice from the IRS or a tax advisor, and more. A licensed tax professional is able to offer counsel on the different types of penalty abatement available to a taxpayer.

The Best Process for Removal

Generally speaking, there are two methods for getting tax debt penalties removed. First, you can elect to deal with the IRS directly, offering an explanation of why you think you shouldn't be held liable for the charges. When you make your case, be sure you've done your research; the agent you're dealing with will expect a valid reason why you're requesting penalty abatement. Knowing what to ask for is important as well; depending on what type of penalty you're looking at, your request can vary. Again, these are essential details to have before talking to the IRS rep.

Alternatively, you may be in better hands with a licensed tax professional when it comes to penalty matters. First, they have experience dealing with the IRS, likely on a daily basis. He or she will know what to ask for, based on the particulars of your situation. There is also certain information that you may not want to volunteer to the government; a tax pro can advise you on what needs to be said and, more importantly, left unsaid. Finally, there may be additional reductions you're eligible for which your licensed professional will quickly identify.

Other Considerations

When determining how to handle your tax situation, there may quite a bit more to consider beyond what you owe in penalties. If your debt is above a certain amount, especially north of $10,000, you may want to pursue some sort of payment option. Ideally, you'll pay your liability in one lump sum to avoid further penalties and interest, but this may simply not be possible. A licensed tax professional can negotiate a reasonable payment plan, based on what you have coming in and going out every month.

There may also be concerns over potentially aggressive IRS collection actions. Something as damaging as a bank levy or wage garnishment can be prevented if you're placed in a formal resolution for your tax debt. Your licensed tax professional can go over your various options, as well as what to expect from the IRS based on how you handle your debt. Even if you only get your penalties removed, you'll have spent your time wisely and saved some money for the next crisis.

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