Next to death and taxes, penalties and interest related to those annual April 15 duties rank right up there on the list of life's ironclad, and unwelcome, certainties.
Just as surely as the Internal Revenue Service takes away a portion of our daily bread for the public good, it punishes those who fail to file, file late, fail to pay estimated or owed taxes or otherwise neglect our responsibilities as taxpayers.
More than 18 million civil penalties were assessed on individual taxpayers in 2002, with a minuscule 126,192 dismissed for reasonable cause. Not great odds. But with extenuating circumstances -- or reasonable cause as the IRS defines it -- on your side, appealing a tax penalty is far from futile.
What we have found is, if it's a one-time thing and you haven't had problems in the past, the IRS is pretty good about abating penalties.
You can even get relief from the interest portion in those rare instances when the IRS made the error.
Statutes indicate that interest may be excused in the case of ministerial or managerial error. Ministerial means the IRS lost the file or it fell through the cracks. Managerial means the IRS delayed your case for some good reason on the IRS' part and the taxpayer shouldn't have to bear the burden.
Here is what you need to know about penalties to decide if you have a fighting chance against the IRS.
Tax penalties are designed for one purpose: to encourage voluntary compliance.
As the ways in which tax shirkers wiggle out of compliance have multiplied, so too has the number of penalties. Today there are more than 150 different penalties, ranging from one-half percent per month for paying your tax bill late to a whopping 75 percent for tax fraud.
It's not uncommon to receive multiple penalties. If you did not file on time and owe tax, for instance, you could be hit with late filing and failure to pay penalties that together would total 5 percent (4.5 percent for late filing plus a 0.5 percent late payment charge) for each month that your return was late, up to 25 percent.
Contrary to public belief, the IRS does have a heart where penalties are concerned. Built into its agent handbook are guidelines for determining reasonable cause that might warrant abating a penalty. They include such things as:
* A mistake made despite ordinary business care and prudence
* Forgetfulness
* Ignorance of the law
* Death, serious illness or unavoidable absence
* Inability to obtain records
* Inability to obtain tax forms
* Return was filed at the wrong IRS office
* Followed advice from a tax adviser
* Followed oral advice from the IRS
* IRS error
These are reasonable cause areas as defined by the IRS, not automatic loopholes out of a tax penalty. If your reason falls into one of these categories, you may be able to convince the IRS to let you off.
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