The IRS can impose harsh penalties for late tax filing, unpaid taxes, or employment tax errors. But, there are ways to reduce or even remove these penalties. Some strategies may even refund penalties you've already paid.
Common IRS Penalties
Here are a few penalties you might encounter:
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Late filing penalty: Up to 5% of unpaid taxes per month, maxing out at 25%. For partnerships and S corporations, it’s $245 per partner or shareholder each month.
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Late payment penalty: Usually 0.5% of unpaid tax per month, up to 25%.
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Failure to deposit employment taxes: This can be between 2% to 10%, based on how late the deposit is.
Strategies to Avoid Penalties
There are several ways to reduce or avoid IRS penalties:
First-time abate: If you haven’t been penalized in the last three years, you may qualify for a “first-time abate.” This is one of the easiest ways to remove penalties for late filing, late payment, or failure to deposit taxes. A clean tax history is required.
Partnership relief: If your business has 10 or fewer partners and all tax items were filed on time, you may qualify for relief under Revenue Procedure 84-35. Many don’t know about this option, but it can be very effective.
Reasonable cause: If neither of the above options works, you can request penalty relief by proving there was a reasonable cause for the delay. Events like illness, natural disasters, or other major life disruptions could qualify.
These strategies could save you money and stress, so it’s worth exploring your options.
If you have questions about this topic or how other tax strategies can help you save taxes book a FREE Tax Advisory Call Today.