IRS Tax Penalty: Do You Have To Pay?Earlier the IRS followed a system for charging tax penalties where a person could be penalized several times for the same offense. This was because there were over 150 penalties which overlapped with each other. In 1989 the IRS reviewed the system and simplified it so that overlaps were brought down to a minimum. At present you can be charged an IRS tax penalty if you file your returns late or if you make a late payment. Disregarding IRS tax rules and regulations, fraud and understatement of income are other grounds for tax penalties. Both over valuation and undervaluation of certain taxes can be considered offenses. If you fail to pay your taxes on time, a compound rate of interest is charged on the unpaid amount from the date the tax was due up to the date that it was paid. The rate of interest changes every 3 months as it is calculated on the basis of the federal short term rate with an additional 3 % added on. There are some situations where you may not have to pay the penalty in spite of having infringed on the rules. If you have acted on wrong advice from an IRS official, the penalty is not levied. However the advice has to have been written and not verbal and the tax information provided at the time needs to have been correct. Honest errors are also excused if the unpaid dues together with the interest accrued are paid to the IRS. A letter of explanation is also expected. It is important to disclose the pertinent information which affects the tax treatment of an item clearly in the tax return. This could help in avoiding tax penalties. An IRS tax penalty can be disputed if you can prove that there is substantial authority for the way the tax on an item has been treated. Tax court cases, congressional reports, tax documents published by the IRS are some of the resources which can help to establish substantial authority. It is important to ensure that the weight of the authority you are using to prove your point can stand up to that which is opposing your tax treatment of the item. An appeal can be made where the tax penalty is assessed by the IRS. You do not have to pay the IRS any tax penalty as long as the appeal is being considered. If you have filed a frivolous tax return, it will be assessed immediately. The IRS tax penalty in such cases will not depend on your tax liability. IRS tax penalties can be waived in special circumstances like natural disasters, wars or other extraordinary situations. The IRS notifies the public about such waivers from time to time. |