If you receive a penalty notice from the Internal Revenue Service (IRS) that you believe is in error—there are steps you can take to respond and request relief.
As you may already know, the IRS charges penalties for a number of errors or violations, including the following:
- The IRS charges penalties for certain errors on your tax return. If you underreport and underpay your taxes, you can be charged a penalty. And if you understate your tax by ten percent, or if the amount you understate is greater than $5,000, you will be assessed a penalty. Similarly, if your return displays basic negligence or error in how and what you filed, you can be assessed a penalty. Examples of negligence could be displayed by not rechecking an outsize tax credit, failing to report tax as it was reported on a 1099 form, or not maintaining records that support the return you filed.
- Employers are responsible for accurate record keeping and payment of payroll taxes, like Social Security, unemployment, Medicare, and federal income taxes. Employment taxes must be deposited with the IRS in a timely fashion. If employment taxes are not paid on time, a penalty is accessed which represents a portion of the taxes that were not deposited appropriately.
- Businesses, estates, companies, and others are required to submit information returns to the IRS that detail reportable transactions. If information returns are not filed on time or do not contain accurate information, filers can be fined a penalty.
If you received notice of one of these or another penalty, you may be able to have the IRS review the penalty if you genuinely feel there is a case to be made for an error out of your control. There are a couple of different ways you may be granted relief from an assessed penalty, including:
- Reasonable cause: If you feel, and the IRS agrees, that you had reasonable cause to make an error, or wrong action, the agency may find that you qualify for relief from the penalty that ensued.
- Statutory exception: Penalty relief may be possible under statutory exceptions like involvement in a military combat zone, location in a federally declared disaster area, or mailing a return on time that did not arrive on time.
- Administrative waiver: Under certain circumstances and if the mistake you made was a first-time error, the IRS may grant penalty relief.
If you believe you were penalized in error, follow the instructions on the penalty notice that you receive in the mail from the IRS. Sometimes that may be a phone call to the IRS to provide information on why you believe the penalty was in error. If the IRS considers your request and denies the relief, you can still appeal the decision. If the penalty is waived, interest assessed on the penalty will also be waived. If you feel strongly that a penalty is in error—connect with the IRS. If the penalty is significant, speak with an experienced tax attorney before you reach out to better understand your options.
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