There are many reasons why the IRS may charge penalties on your tax account. The IRS is legally required, under Internal Revenue Code (IRC) § 6601, to charge interest when you fail to pay the full amount you owe on time. Interest may also accrue on penalties. Interest and any applicable penalties will continue to accrue until you pay your balance due in full. Here are some of the most common penalties, information on why they may have been charged, and how to request penalty abatement (removal) if applicable.
First let’s talk about some common penalty charges on individual accounts, along with interest, and why the IRS charges them.
Penalties (and the reasons for them) include:
- Failure to file – when you don’t file your tax return by the return due date or extended due date if an extension to file is requested and approved.
- Failure to pay – when you don’t pay the taxes reported on your tax return in full by the due date of the original tax return. An extension to file doesn’t extend the time to pay so you must pay your taxes by the original due date of the tax return even if you have requested an extension of time to file your tax return. In addition, the IRS may charge a failure to pay penalty if the IRS makes a notice and demand for payment and you fail to pay on time.
- Failure to pay proper estimated tax – when you don’t pay enough taxes due for the year with your quarterly estimated tax payments, or through withholding, when required.
- Bad check – when your bank doesn’t honor your check or other form of payment.
The IRS is required to charge interest on any unpaid balance owed until it is paid in full. See the chart on the IRS’s Interest page for more details.
Common scenarios where you may get penalty and interest charges
Here are some common scenarios this year where you may see penalty and interest charges, and how to handle them.
- I sent a payment to the IRS, but I still got a bill with penalty and interest charges. What can I do?If you mailed a payment in 2021 to the IRS on or before May 17, it may still be unopened in the backlog of mail the IRS is processing due to COVID-19. See the information for Received a Bill or Notice and Sent Us a Check for more details. The IRS will process your payment with the date the IRS received it. Do not cancel your check, and make sure funds are available for when the IRS processes your payment.
- I received penalty and interest charges because I did not pay yet. What are my options?First, it’s important to understand that applicable penalties and interest will continue to accrue until the account is paid in full, so the sooner you pay the balance, the less you will have to pay in penalties and interest.
There are a number of ways you can send a payment, including payment options if you cannot full pay right now, see the IRS Pay webpage or our articles File by May 17; here are some options and Need options for when you owe federal taxes, but can’t pay in full?
How can I dispute IRS penalties?
If you were affected by the pandemic or other circumstances, the IRS may be able to remove or reduce some penalties due to reasonable cause, but only if you tried to comply with the tax law but were unable to due to facts and circumstances beyond your control. If this applies to you and you have the necessary documentation to support your claim, you can call the toll-free number on your IRS notice or write a letter to request penalty relief due to reasonable cause.
See the IRS reasonable cause relief page for more details.
The IRS will also consider the following situations for waiving penalties:
What if the IRS denies my penalty abatement request?
If the IRS rejects your request to remove a penalty, you may be able to request a conference or hearing with the IRS Independent Office of Appeals. You have 30 days from the date of the rejection letter to file your request for an appeal.
Refer to Penalty Appeal Eligibility and Publication 4576, Orientation to the Penalty Appeals Process for more details.
How do I request removal of interest charges?
If any of your tax and/or penalties are reduced, the IRS will also automatically reduce the related interest.
The IRS doesn’t remove or reduce interest for reasonable cause or as first-time relief. Interest is charged by law and will continue until your tax account is fully paid.
The IRS may only reduce the amount of interest you owe if the interest is due to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act.
What else do I need to know?
The IRS will continue to charge failure-to-pay penalty up to 25% in total or until the tax is paid in full, whichever comes first. In general, the IRS won’t abate the failure-to-pay penalty until the underlying tax has been paid in full. Be aware that if there is still a balance due, even after the penalty is removed, interest will continue to accrue until the account is paid in full.
As of this date, the IRS response times for calls and written submissions is still being affected by the ongoing Coronavirus situation, so see the IRS Operational status page, including the section on Answered a Letter or Notice, for more details. However, even if the IRS takes a bit longer to address your request, if granted, all applicable penalties (and associated interest) will be removed as appropriate.
If you have any questions regarding international taxation, IRS representation, U.S. tax implications of Real Estate accounting, domestic taxation, essential business accounting, transactions or financial statements, please give us a call at 305-274-5811.