Keeping track of your taxes sounds easier than it is. In fact, about one in 5 people owe money to the IRS in 2019 alone. With so many people struggling to understand our 75,000-page tax code, it becomes inevitable that some end up with unpaid taxes. In addition, circumstances such as being in prison, falling seriously ill, or losing your records in a fire may lead to further tax complications. In many instances, the solution may include options of an IRS settlement.
If you’ve fallen behind on your tax debt, the IRS may assess many different penalties against your outstanding bill. There are over 100 penalties that you may be assessed, which could further compound your original tax debt. Luckily, various IRS settlement options are available to help you get back on track with your taxes.
Under the right circumstances, the IRS may work with you to resolve an outstanding tax bill by abating (lowering what you owe), offering a payment plan, or giving you an Offer in Compromise for the outstanding amount owed.
A Tax Resolution Service like True Resolve Tax can also help you explore your options to determine which one works best for your current situation. However, tax abatement is one of the best options available, as the IRS will remove most of the penalties assessed against your outstanding tax bill.
Common IRS Penalties you may incur
If you fail to file your taxes, file them late, or make mistakes during filing, the IRS may assess penalties against what you currently owe. Such penalties can add to the difficulty of repayment, as they further compound an existing tax bill. Penalties may add as much as 70% to what you first owed.
You may be wondering which penalties are commonly assessed, and how they could affect what you owe. Some of the most common fines include:
A failure to file
If you fail to file your taxes by the stipulated deadline, you may end up incurring a fine. This penalty is typically 5% (of the original tax amount) for each month you don’t pay, and it maxes out at 25%.
Failure to pay
If you file a return, owe taxes to the IRS and fail to pay them on time, you will incur a penalty of 0.5% of the unpaid amount for each month you’re late.
Understating your tax bill
Understating taxes owed is a common issue faced by the IRS. If you understate your tax bill by 10%, or by more than $5000, you may incur additional penalties.
Civil penalty fraud
If you use fraudulent channels to underpay your tax bill, you may face a 75% fine on your unpaid tax amount.
Penalty for negligence
Preparing accurate personal taxes requires attention to detail. Those who are found to be negligent in complying with tax laws, or preparing their returns incorrectly, may be assessed negligence penalties. These penalties also apply to companies that fail to keep their record books organized.
How the First Time Penalty Abatement works as an IRS settlement
In line with penalties that you could incur on an outstanding tax bill, several IRS settlement options may reduce your fines (as well as interest). One of the most common IRS settlement options available is the First Time Penalty Abatement (FTA).
Tax abatements refer to the lowering (or waiving) of penalties that may have accumulated on your tax bill. Because these fines can significantly increase the original amount owed, tax abatements allow you to lower your total amount due and clear your past-due taxes on time.
The First Time Penalty Abatement is provided to first time offenders who may have failed to file, pay, or deposit funds with the IRS. If you’ve maintained a history of filing your taxes on time and making timely payments on outstanding debt, the IRS may lower or waive all penalties that were assessed on your tax bill.
This IRS settlement option can lower or waive the following penalties:
- Failure to file penalties: the 5% penalty per month for failing to file (or filing late) can be reduced or waived via the first-time penalty abatement option.
- Failure to pay: the 0.5% monthly penalty for failing to pay your taxes could also be waived.
- Failure to deposit: A failure to deposit penalty is associated with payroll taxes. If you (or your business) fails to submit any withheld payroll taxes to the IRS, deposits funds late, or deposits an incorrect amount, you may end up with costly fines and penalties. Luckily, the first-time penalty abatement option allows you to pay a lower (or no) penalty as a first-time offender.
Do you qualify?
Not everyone will qualify for first-time penalty abatement. Even if this is your first time applying for a penalty reduction, you must meet several eligibility criteria. These include:
You don’t have any tax penalties incurred from the prior 3 years
To qualify for FTA, your prior 3 years of tax returns should be free of any penalties. Keep in mind that the IRS doesn’t consider penalties of under $100 (for example, a $50 fine won’t necessarily make you ineligible for the first-time reduction).
Penalties for underpaying on estimated taxes are also not considered against you when seeking abatement.
You’re current with all tax filings for the year (and previous years)
You also need to have filed all your current tax returns (and extensions) before applying for a penalty abatement. Any outstanding paperwork will make you ineligible for this IRS settlement option.
You’ve developed an arrangement to pay any outstanding debt with the IRS
You must also be current with your outstanding tax debt. Any unpaid amounts should be fully settled, or you should set up a payment plan and remain in good standing with your repayment schedule.
In most cases, the IRS will only offer abatement for penalties incurred within the first year. If your tax penalties extend across multiple years, you must show a reasonable cause for these fines occurring repeatedly. A reasonable cause refers to situations that were out of your control and resulted in your current tax debt.
Some common reasons why you may have incurred penalties include:
- A natural disaster destroyed your tax records
- You were in prison when the penalties were assessed
- You were grieving the loss of a family member/relative
- A tax professional (or IRS representative) gave you the wrong information
- Any other undue hardship
How to prepare a strong application for FTA
After establishing that you qualify for a first-time penalty abatement, you may be wondering how to apply for this settlement option and ultimately reduce your tax burden. Individual taxpayers in Colorado can apply for the FTA online, in writing, or via the phone.
The process may be as simple as having your fines removed on the spot. However, you may need to settle your original tax amount in full before the penalties are reduced/waived.
How a Tax Resolution service can help
Even if you qualify for penalty abatement, you may still need the help of a professional tax resolution service when seeking IRS settlement options. The agents at True Resolve Tax are the experts you need when presenting your case to the IRS. We can help you prepare a strong first-time penalty abatement (FTA) application to the IRS so you can pay fewer or no tax-related penalties.