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The IRS and Penalties

The IRS and penalties they charge are an important topic to understand. One of the most common reasons why individuals fail to file Form 1040, the U.S. Individual Income Tax Return, that should be filed annually, is because they know they will owe the Internal Revenue Service, but are unable to pay the liability.

Filing returns that are past due are not any different than filing for the current tax year. If you choose to not file your past due returns or do not contact the IRS, the IRS will start to take action. Deliberate non-compliance can lead to additional tax penalties and potentially criminal prosecution.

Taxpayers should file every year, even if a full payment cannot be made. Taxpayers who are not able to pay the tax liability due on the bill are encouraged to pay as much as possible. This will help limit the amount of interest and penalties owed. Taxpayers should file all unfiled returns that are past due to avoid additional penalties and interest. The IRS can impose penalties for filing returns late, paying tax liabilities late, or both. The IRS will charge interest on any unpaid tax.

Whether you are paying with a timely filed tax return, filing late, or paying late after receiving a bill from the IRS and IRS penalties charged, taxpayers are encouraged to pay back taxes in full. Paying taxes owed in full costs the least amount of money in the long run. If you file a return, you are entitled to deductions, tax credits, and personal exemptions. If you choose not to file a return and you owe taxes, delaying filing will lead to penalties on the tax owed, as well as interest charges which will increase your tax debt owed.

There are IRS programs designed to help taxpayers meet any back taxes obligations, without causing hardships. An installment agreement allows the taxpayer to pay off a tax liability due. There is also the option for an Offer in Compromise which allows a taxpayer to settle for less than the tax liability owed. In both cases, taxpayers must submit additional documentation and meet strict requirements.

If taxes are not paid and if there is no effort made by the taxpayer to make payments, the IRS will file a substitute return. Substitute returns will not include any exemptions, deductions, or credits that the taxpayer could claim and tax you at the highest rate. Often times the real tax liability is less than the substitute return amount due to the IRS overstating the real tax liability.

After the substitute returns are filed and a balance owed is established, the IRS can start to work to collect the tax liability owed. The IRS will send bills to tax payers for the tax due and penalties charged, plus additional amounts for penalties and interest. The IRS can ask a taxpayer to get a loan or sell any valuable assets they own. The IRS could also take collection actions and levy wages and bank accounts, or file a Notice of Federal Tax Lien. Taxpayers who repeatedly do not comply with the law are subject to additional enforcement measures.

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