If you really do owe unpaid taxes, there’s generally not much you can do about the taxes or interest – you’ll have to pay up. However, you can likely get some, if not all, of the penalty and interest decreased. IRS penalties often do not apply when you acted in good faith, based on a reasonable cause for your actions. Penalties apply only if you deliberately attempted to cheat, deceive or mis-lead the IRS.
Immediately pay the tax and interest you owe and fill out IRS Form 843. Above the word “Claim” on this form, enter in “Demand for Abatement of Penalties under Code Section 6404(a).” When you return Form 843, include a detailed explanation of why your penalty should be canceled.
Your letter should lay out the facts so the IRS will evaluate that you acted in good faith and based on reasonable cause for your actions. You should spell out in black and white that you never deliberately set out to break the law.
This form is used a lot these days since a growing number of tax preparers are emerging with limited training—and these folks can and do make mistakes when calculating tax returns. Luckily, as long as you acted in good faith and didn’t deliberately try to violate the IRS’ rules, the penalties should get waived.
Sometimes the most crushing aspect of a tax bill can be the added interest charge. If you could earn that kind of return on your investments you’d never have to work again! If any of us charged those kinds of rates, we might end up behind bars!
A Straight Tip
- When the interest is due to an error made by the IRS;
- When the interest is due to delay caused exclusively by the IRS; or
- When the interest is demanded on money which the IRS sent in error.
To cancel interest, write a letter that states, “Interest should be canceled because” and list which condition the cancellation of interest meets. Be specific and demand cancellation. Mail your letter to the Service Center which issued the bill.
A Smart Money Move: Send all correspondence with the IRS, including your tax return, via certified mail, with return receipt requested. This way you have tangible proof that your letter or return was both mailed by you and received by the IRS.
Here are two common penalty triggers – and some advice on how to avoid paying any penalties:
1. Underpayment of Your Estimated Taxes. When you are self-employed, or your employer does not withhold your taxes (and send them to the IRS for you), you must pay estimated taxes each quarter. How much tax should you pay? Either 90% of what you think you owe, or 100% of what you paid last year. If you get to the end of the year (or, more likely, April 15th of the following year) and realize you didn’t pay enough, the IRS slaps you with a penalty!
A Smart Money Move: You can avoid penalties if your income came in unevenly during the year (use Form 2210), or if underpayment was due to some disaster, casualty or other unusual circumstance.
2. Late Filing. Your tax return is due by April 15. And if you file late (without an approved extension), the IRS will hit you with a 5% penalty for every month you are late, up to a maximum of 25%. The penalty for paying your taxes late is 0.5% per month, also capped at 25%. During any month in which you incur both penalties, you only get charged 5% per month.
You can avoid these penalties altogether, with one of these reasons:
- You filed by April 15th, but sent your return to the wrong IRS office.
- You got your return to the post office in time (by midnight on the 15th) and have a certified mail receipt to prove it.
- You filed late because of serous illness or a death in the family.
- You filed late because you were out of the country unavoidably.
- You went to an IRS office for help (before April 15), but no one could meet with you.
- Your professional tax advisor incorrectly advised you.
- Your records were destroyed by flood or fire in your home or in your office.
- For reasons beyond your control, you were unable to obtain the necessary records to determine how much you owed.
- You applied for necessary IRS forms in advance, but did not receive them in time.
10. You relied on wrong information provided by an IRS worker or in an IRS publication.
© 2009, Bruce Mc. All rights reserved.
BAM
Just a word on your statement “Send all correspondence with the IRS, including your tax return, via certified mail, with return receipt requested. This way you have tangible proof that your letter or return was both mailed by you and received by the IRS.”
It is my opinion that a certified mail receipt means absolutely nothing to the IRS. It only means that they received an envelope from you. It is an unnecessary expense and a waste of time.
At a tax workshop many years ago one tax pro told the tale of a colleague who would send a blank envelope to the IRS – via certified mail return receipt – on the 15th and 30th of each and every month. This way he would have a receipt in case he ever needed one.
My statement, under penalty of perjury, that I placed the envelope containing the completed Form 1040 in the mailbox at the local Post Office on April 15th would carry much more weight with the IRS than a PO mail receipt.
Otherwise a good post with good advice!
TWTP
RDF
Thanks for the input.
ON MY PERSONAL TAXES, WOULD IT BE BETTER TO GET A LOAN THAN TO PAY THE GOVERNMENT INTEREST AND PENALTIES ON $12,000 AT $200.00 PAYMENT PER MONTH?
Kathi,
That depends on your personal situation. It isn’t a bad idea as the IRS rates are a bit high (okay extremely high) Check to make sure you can afford something like this, haw fast you can pay it off, a whole lot of factors are involved. I would recommend that you visit openly with a CPA that is also a tax professional.