Federal Tax Penalties

Well, there’s good news and there’s bad news. The bad news is that IRS can levy several types of federal tax penalties but the good news is that some of them could be cancelled if you and your tax attorney remain aware of your rights.  The IRS addresses Penalty Cancellation in Publication 1 "Your Rights as a Taxpayer" stating "The IRS will waive penalties when allowed by law if you can show you acted reasonably and in good faith or relied on the incorrect advice of an IRS employee."

Federal Tax Penalty Abatement

Good Faith

You have acted in good faith when your actions were not intended to break the law even if they were wrong. This can include ignorance of the law, proof that you just innocently made a mistake, bad advice from the IRS and bad advice from a Certified Tax Professional (like an attorney or accountant).

Reasonable Cause

Reasonable Cause is the good excuse for failing to act on your tax debt. It is very important to notify the IRS of your reasonable cause as soon as possible.

Some common examples of constituting acceptable reasonable cause are:

• Serious Medical Problems such as a prolonged illness or injury
• Natural Disasters requiring you to move from your home such as wildfire or flooding
• Financial Problems due to sudden unemployment
• Drug/Alcohol Addiction
• Loss of financial records (not due to simple negligence) such as house containing records burned to the ground in wildfire.

Now, if you had a “Good Faith” and “Reasonable Cause” excuse, you might then be able to prevent penalties from accruing on your tax debt. The challenge is then to prove the excuses to IRS who will require very specific information from you to that end.  An experienced tax lawyer can point out all the loop holes to aid you in your battle against the federal tax penalty monster, the IRS.

The most common reasons IRS will levy a penalty are:

• Filing your tax return late
• The IRS penalty for filing late is generally 5 percent each month, or partial month, and can be up to 25 percent of the amount due on your tax return.
• Paying your due tax late
• The IRS penalty for paying late is 0.5 percent per month, up to 25 percent of the unpaid amount that is due.
• Frivolous return penalty
• There is a  $500.00 penalty if you file a return that does not have enough information to even figure your tax.
• Accuracy-related penalty
•  An accuracy-related penalty of 20% applies to any underpayment due to taxpayer negligence in reporting or intentional disregard of rules or regulations.
• Substantial understatement of income tax penalty
• A taxpayer has understated his tax due if the tax shown on your return is less than the correct tax and the penalty is: 10% of the correct tax or $5,000 whichever is larger.
• Fraud in reporting

If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax and criminal charges may also be filed.

Legal Help for Federal Tax Penalties

Obtaining the assistance of a tax attorney is the best way to guarantee a taxpayer his best shot at successfully challenging an IRS tax levy in order to have it waived entirely.  An experienced tax attorney and at taxpayer that knows his rights are always the best team to get the job done.