Every year, individuals and businesses must pay taxes unless their income is below the threshold for tax liability. Additionally, with a few exceptions, tax returns must be filed. Failing to meet either requirement results in penalties.
Common IRS Penalties
- Failure to Pay Penalty: If you file a return but don't pay the taxes owed, the IRS will charge a penalty of ½ of 1% of the unpaid taxes each month. This penalty can accumulate up to 25% of the unpaid taxes.
- Failure to File Penalty: If you fail to file a tax return when required, the IRS imposes a penalty of 5% per month on the taxes owed. This fine can also reach a maximum of 25% of the unpaid taxes.
These two penalties are the most common, but there are ways to reduce or eliminate them.
Interest on Unpaid Taxes
In addition to fines, the IRS charges interest on any unpaid taxes. This interest also applies to penalties. For example, if you incur a $1,000 Failure to File Fine, you will be charged interest on both the $1,000 fine and the unpaid taxes. While penalties can sometimes be reduced or eliminated, interest reduction is more complex and, in many cases, has no limit.
Reducing Penalties and Interest
A skilled Dallas tax attorney can help reduce or eliminate penalties and interest. There are two primary methods:
- Abatement of Penalties: In some cases, if conditions are met, the IRS will eliminate all fines for a specific year, including any interest added to those fines. For example, if you have a $1,000 Failure to File Fine and $500 in interest, abating the $1,000 penalty will also remove the interest.
- Reduction of Penalties: If you can demonstrate reasonable cause for the penalties, such as illness, the IRS may agree to reduce or eliminate the fines.
Making a case for penalty and interest reduction requires a solid understanding of IRS procedures. Call us to see if you qualify for abatement.