How to Lower IRS Penalties

Tax penalties provide a consistent stream of revenue for the United States government. Funds accrued through tax penalties annually are so reliable that the government has enough confidence to use them in the budgeting and forecasting process. Such penalties can make a manageable situation spiral out of control, if not attended to in the appropriate manner. With that said however, there are steps you can take to lower your IRS penalties, or even better, prevent them altogether.

Things You'll Need

• Internet access
• Appropriate forms to file tax returns

Instructions

1. File your tax returns on time. Filing your tax returns late, (particularly if you owe taxes) means incurring hefty penalties. There will be a levy of 5 percent attached each month to the amount of taxes owed, up to five months or 25 percent of total amount. If you are unable to pay your taxes, you should file your return anyway, rather than procrastinate, as the penalty for not filing tends to be far more expensive, than failure to pay on time.

2. Remit payment of your taxes on time. April 15th is the due date for paying all individual income taxes owed. If you fail to pay your taxes before or on that date, there is a penalty for failure to pay. This penalty accrues at .5 percent a month and kicks in on April 16th if you neglect to pay your taxes in full. The IRS can also raise this amount to 1 percent a month, if you continue to refrain from paying the full amount owed, plus penalties assessed, up to 25 percent of the amount owed.

3. Seek an agreement to pay in installments, if circumstances prevent you from paying in full. By entering into such an agreement, the IRS will be more willing to work with you and reduce the penalties for failure to pay by as much as half. The IRS looks favorably on those that are upfront regarding their tax issues and has solid processes in place to assist those individuals in regaining full compliance with IRS tax regulations.

4. File for an extension if you are unable to remit payment on or by April 15th. Rather than filing your tax return, you will file for a six-month extension. This extension request does not offer a reprieve to make payment however; you are still required to remit 90 percent of taxes owed by the 15th of April. If payment is not made, you will be hit with the failure to pay penalty, which is less than the failure to file penalty, lowering the total penalties assessed.

5. Remove or lower penalties if they have already been levied against you, through a process referred to as "penalty abatement." You will need to demonstrate to the IRS that you have "reasonable cause" for neglecting to file or remit payment of taxes in a timely manner, and in many case the penalties levied will be withdrawn or lowered. The IRS has a consistent track record of withdrawing around 30% of penalties assessed annually.

Tips & Warnings

• The most prudent action you can take to lower or avoid tax penalties is to be proactive in solving your problems as quickly as possible by making the IRS aware of letting your intentions be known.

• If you do not fully comprehend particular tax codes, concerns or regulations as they apply to your situation, you should enlist the assistance of a qualified tax professional. Tax penalties often can be avoided and understanding the reasons they are assessed can save you quite a bit in the long-term.

References

• Tax Help Attorney: Penalty Abatement
• IRS: IRS Notices and Bills, Penalties and Interest Charges
• Alloy Silverstein: How to Avoid IRS Penalties

Resources

• USA Today: Offshore account holders told fess up to lower penalties