Making tax penalties less painful
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 taketh
away a portion of our daily bread for the public good, it smiteth
those of us 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," says Steve Kassel, a former
IRS agent who now practices as an enrolled agent in San Bruno,
You can even get relief from the interest portion
in those rare instances when the IRS made the error, according to
Robert Nath, a Washington, D.C., tax attorney and author of "The
Unofficial Guide to Dealing with the IRS."
"The statute says interest may be excused in
the case of ministerial or managerial error. Ministerial means they
lost the file, it fell through the cracks. Managerial means we delayed
your case for some good reason on our part and you shouldn't have
to bear the burden," says Nath. "Now having said that,
getting the IRS to admit to something like that is almost impossible."
Effective appeal of a penalty takes time, persistence
and a pretty great excuse for running afoul of the tax code. And
unlike a court case, you are guilty until you prove yourself innocent.
What's more, it may not be worth the money to hire a tax professional
to plead your case.
"You may end up spending as much money getting
it abated" as you would to pay the penalty, says Kassel.
Here's what you need to know about penalties to decide
if you have a fighting chance against the IRS.
The purpose of the penalties
Tax penalties are designed for one purpose: to encourage voluntary
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
- 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; if it doesn't, you are out of luck.
Good and bad excuses
Some of these reasons clearly won't fly, with or without a convincing
argument. For example, despite the complexities of tax forms today,
it would be tough to plead ignorance of the law for a late-filing
penalty. What part of April 15 didn't you understand?
Other causes, such as death, serious illness or unavoidable
absence, tend to be more compelling.
"There are some heart-wrenching stories that
people can tell. Things can get pretty overwhelming," says
Nath. "When your child just got diagnosed with cancer, you
don't turn around and say, 'OK, that's nice, but I need to file
this tax return.'"