What are the IRS penalties for underpayment?

If you didn’t pay your taxes, or if something went wrong with your return, you may have outstanding debt. There are two types of underpayment penalties. The first comes with the filing of your tax return because you did not prepay enough taxes through withholding or estimated tax payments. This penalty is determined by the federal treasury rate each quarter during the tax year. The second, and largest, type of underpayment penalty is due when you don’t pay your taxes by the due date of your tax return. This penalty can be as much as 25 percent of the taxes owed, and is compounded immediately and assessed regularly until you pay the debt. The IRS can take your tax refund each year to help pay the debt, and they might issue claims on your property and/or assets, or even take money directly from your paycheck, which can be a stressful experience.

Here’s what owing the IRS could mean for you:

  • The bill keeps growing since penalties are assessed each month and interest is compounded daily.
  • If you are not working on a resolution and on a timely payment plan, your security clearance and/or your job can be jeopardized.
  • IRS can take your tax refund and apply it to your outstanding debt.
  • In the most delinquent cases, IRS can assess a levy on your paycheck and take a portion of it each payday.

The IRS’ goal is to work with you to resolve your debt before taking collection actions. Most taxpayer penalties for not paying a debt are monetary and do not include any criminal penalties. Jail time is typically reserved for taxpayers convicted of tax fraud.

What is a first-time abatement?

If this is the first time you’ve owed the IRS money, you can request a first-time abatement (FTA). If you prove to the IRS this is the first time you have been in a non-payment status on taxes, you can request an abatement of tax-related penalties for one tax period. You must show you previously didn’t have to file a return, or you filed and paid your previous taxes and have a three-year history of no penalties. To demonstrate filing compliance, you must have filed, or filed an extension for, all of your tax returns; you can’t have an outstanding request from the IRS for a return you didn’t file. The same goes for payment compliance: You must have paid, or made arrangements to pay, any tax you owe. You can be on a current installment agreement with the IRS, meaning your payments are up-to-date. Keep in mind that first-time abatement is a one-time offer. If you’ve already used FTA, then you would need to look toward a reasonable cause penalty abatement.

What is reasonable cause for penalty abatement?

There are many reasons to abate penalty, in addition to the first-time penalty abatement. Some examples include:

  • Fire, casualty, or natural disaster
  • Death, serious illness, or unavoidable absence
  • Inability to get records
  • Erroneous IRS advice

This list is not exhaustive, as reasonable-cause abatement considers the facts and circumstances in your situation. Ultimately in order to successfully argue for a reasonable cause abatement, there must be extenuating circumstances which, if the full amount of penalties were assessed, would lead to either your financial hardship or egregious overextension of penalties through no fault of your own.

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