Avoid IRS Penalties and Interest This Tax Season

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Copyright © 2009-2010 Manny Davis


With the US economy sputtering along, Federal tax revenues falling, the IRS is much more cognizant of those taxpayers who have fallen out of compliance. In fact, if anything the IRS's computerized Automated Collection System (ACS) is stronger and well funded from the Federal Stimulus.

Here are a few key things to know about penalties and interest when filing or paying your taxes:

Extensions

If you didn't know, you can request an extension to file your taxes up to 6 months, which means the deadline would be October 15th instead of April 15th for 2010. Realize though this is not an extension to pay, but an extension to file only. If you don't know what you owe, as long as the IRS has 90% of what you owe them, you will not be hit with a failure to pay penalty.

Failure to Pay Penalty

With the failure to pay penalty you will accrue a 0.5% interest rate per month on the portion of the unpaid balance. This penalty can be increased by the IRS (e.g. if you haven't responded or paid in a while) but can be no more than 25% of the unpaid balance. If you can show reasonable cause to the IRS why you haven't paid, they may eliminate this penalty.

Failure to File Penalty

If you cannot pay your taxes, still pay what you can and file a tax return. Why? If you miss the filing deadline (April 15th) or (October 15th with an extension), you will accrue a 5% penalty per month on your tax balance up to 25% (5 months). One thing to note is that whenever the above two penalties intersect on one month, the total combined penalty would be 4.5%, as the failure to file penalty would decrease by .5%.

Underpayment Interest

As an individual taxpayer, you will be charged an underpayment penalty that is determined by taking the short-term federal rate (currently 1%), plus 3% for taxpayers. Therefore, any unpaid balance you have will be around 4% (currently) plus .5% penalty for failing to pay (6% annually) therefore summing to a total tax rate of 10%. If you enter into an installment agreement or payment plan with the IRS you can cut the total interest rate to 7% currently.

Exceptions:

In some cases, if you have good reason you can file to have both penalties abated or removed but you must have good reasons such as you have a major illness, you experienced a death by a close family member, your records were destroyed which was out of your control, or any major disruption to your life if "reasonable."




About the Author:
Manny Davis is a tax accountant. If you are looking for more information on resolving IRS back taxes, as well as penalties and interest visit http://www.BackTaxesHelp.com/ today. Find articles, guidelines, as well as IRS penalty abatement help from a diverse tax team made of tax attorneys, CPAs, tax accountants and Enrolled Agents.