Got IRS Penalties? Know the Rules, Pay Nothing

If you’ve received a penalty notice from the IRS, don’t rush to pay it. There are ways to reduce or even eliminate IRS penalties if you know how to approach the situation. Whether you’re facing late filing, late payment, or failure-to-deposit penalties, understanding the rules and using the right strategies can save you significant money. It’s important to know what happens if you don’t file on time, as this can affect your penalty amount and the steps you need to take to resolve the issue.

At Molen & Associates, we’ve helped countless individuals and businesses resolve IRS penalties. This guide explains the most common penalties and the steps to get them waived or refunded.

Common IRS Penalties and Costs

1. Failure-to-File Penalty

• Individuals and C Corporations: 5% of unpaid taxes for each month (or part of a month) the return is late, up to 25%.
• Partnerships and S Corporations: $245 per partner/shareholder per month, up to 12 months.
• Minimum Penalty for Returns Over 60 Days Late: $510 or 100% of the tax owed, whichever is less.

2. Failure-to-Pay Penalty

• 0.5% of unpaid taxes for each month (or part of a month), up to 25%.
• If both failure-to-file and failure-to-pay penalties apply in the same month, the combined rate is capped at 5% per month.

3. Failure-to-Deposit Penalty (Employment Taxes)

• 2% for deposits up to 5 days late.
• 5% for deposits 6–15 days late.
• 10% for deposits more than 15 days late.

Examples of Penalty Costs

• Late 1040 Filing: Filing two months late on a $3,000 tax bill incurs $300 in penalties ($270 for late filing, $30 for late payment).
• Late S Corporation Return: A 10-shareholder S corporation filing 5 days late faces a $2,450 penalty.
• Late Employment Tax Deposit: A $4,000 deposit missed by six days results in a $200 penalty.

Three Ways to Get IRS Penalties Waived

1. First-Time Abate Relief

The IRS offers first-time abate relief for taxpayers with a good compliance history. You can request this relief if:

• You’ve filed all required returns for the past three years.
• You haven’t been penalized in the prior three years, or previous penalties were removed for a reason other than first-time abate.

How It Works:

• Request relief for one tax period per return type.
• Use the term “first-time abate” when contacting the IRS.

Example:
You have penalties for four late payroll deposits. First-time abate relief applies to only one period. For the remaining three, you’ll need another strategy, such as reasonable cause.

2. Partnership Relief

Late-filing penalties for partnerships can be waived under Revenue Procedure 84-35 if:

• The partnership has 10 or fewer partners.
• All partners are individuals or estates.
• Each partner reported their share of income, deductions, and credits on time.

When calling the IRS, reference Revenue Procedure 84-35 and explain your partnership’s compliance.

3. Reasonable Cause Relief

If first-time abate or partnership relief doesn’t apply, you can request relief by demonstrating “reasonable cause.” This involves providing a valid explanation for why you failed to comply, such as:

• Death or Serious Illness: Provide the date and nature of the event, its impact on your ability to file or pay, and proof of resolution.
• Natural Disaster or Disturbance: Explain how the event affected you and provide documentation of the disaster area if applicable.
• Inability to Obtain Records: Show what records were unavailable, why they were necessary, and your efforts to comply.

The IRS requires detailed, specific explanations. Avoid reasons like “I forgot” or “I didn’t know the law.” These are not considered valid excuses.

Handling Large Penalties

For substantial penalties, the IRS may require a written request for relief. If the initial request is denied, you can appeal the decision. The denial letter will include instructions for filing an appeal with the IRS Appeals Office.

Already Paid the Penalty?
You can still request a refund using Form 843, as long as you file within:

• 3 years of the original return’s filing date, or
• 2 years of the penalty payment date.

Interest Relief

The IRS charges interest on unpaid penalties, which increases your balance over time. If your penalty is reduced or removed, the IRS will automatically adjust the related interest.

Takeaways

1. First-Time Abate Relief: A quick and often successful option for removing penalties if you meet the compliance criteria.
2. Partnership Relief: Use Revenue Procedure 84-35 for partnerships with 10 or fewer partners.
3. Reasonable Cause Relief: Provide detailed, documented explanations for why compliance was not possible.
4. Refund Opportunities: If you’ve already paid the penalty, file Form 843 to request a refund.

How Molen & Associates Can Help (What happens if you don’t file on time)

If you’re dealing with IRS penalties, Molen & Associates can assist you in resolving them quickly and effectively. We provide:

• Expert guidance on first-time abate, partnership relief, and reasonable cause arguments.
• Help with documentation and appeals for penalty removal.
• Strategic advice to avoid future penalties and ensure compliance.

Why Choose Molen & Associates? (What happens if you don’t file on time)

• 40+ Years of Experience: Trusted for tax resolution and planning since 1980.
• Tailored Solutions: Personalized strategies for resolving penalties and maintaining compliance.
• Proactive Support: Year-round assistance to help you avoid penalties in the first place.

Don’t Pay More Than You Owe (What happens if you don’t file on time)

IRS penalties can be daunting, but with the right approach, they’re often avoidable—or refundable. Let Molen & Associates help you navigate the process and save money.

Call us today at 281-440-6279 to schedule a consultation, or visit our website to learn more about our tax resolution services. Take control of your IRS penalties and pay nothing more than you owe.