Facing IRS Penalties? A Guide to What's Next

Published on: July 16, 2024

Written by S. Houston, Esq., LLM Taxation

Receiving a notice from the IRS can be a moment of dread. A letter detailing unexpected tax penalties and interest can feel overwhelming. But it doesn't have to be a catastrophe. Understanding *why* the IRS charges these fees is the first step toward resolving them.

At Houston Law, we specialize in helping business owners navigate these exact challenges. This post breaks down the common reasons for IRS penalties and what you can do about them.

Why the IRS Charges Penalties and Interest

The IRS is legally required to charge interest on any unpaid tax balance, and penalties are added to encourage timely filing and payment. Think of it as a "pay-as-you-go" system. Your business is expected to pay taxes throughout the year as it earns income. Here are the most common triggers for a penalty notice:

• Failure to File: This occurs if you don't file your tax return by the deadline (or your approved extension date). The penalty is typically 5% of the unpaid taxes for each month the return is late, capping out at 25%.
• Failure to Pay: This penalty applies when you don't pay the taxes you've reported by the original due date. This fee is usually 0.5% of your unpaid taxes per month, also maxing out at 25%. Remember, an extension to file is not an extension to pay.
• Failure to Pay Proper Estimated Tax: As a business owner, you likely need to pay estimated taxes quarterly. If you don't pay enough tax throughout the year via these payments, you can face an underpayment penalty.
• Dishonored Payment: If your payment to the IRS (like a check or bank transfer) is returned for insufficient funds, a "bad check" penalty is applied.

"I Received a Penalty Notice. What Are My Options?"

Seeing a penalty amount on an IRS notice can be shocking, but don't assume it's set in stone. The IRS has provisions to reduce or even eliminate penalties in certain situations. This is known as penalty abatement.

1. First-Time Penalty Abatement

If you have a clean compliance history, you may qualify for the First-Time Abatement (FTA) program. Generally, you are eligible if you:

• Have not had any IRS penalties in the prior three tax years.
• Have filed all currently required returns (or filed for an extension).
• Have paid, or arranged to pay, any tax due.

FTA is a powerful tool for business owners who made an honest mistake.

2. Reasonable Cause

You may also get penalties removed if you can demonstrate you had a "reasonable cause" for not filing or paying on time. This isn't just an excuse—it requires showing that you exercised ordinary business care and prudence but were still unable to meet your tax obligations. Valid reasons can include:

• A fire, natural disaster, or other casualty.
• Inability to obtain necessary records.
• Death, serious illness, or unavoidable absence of the taxpayer or an immediate family member.
• Receiving erroneous advice from the IRS.

Properly documenting your situation is critical for a successful reasonable cause claim.

3. Statutory Exception

In some cases, specific laws may provide an exception to a penalty. A common example is if you received incorrect written advice from the IRS, which you then relied upon. This can be complex to prove, but a qualified tax attorney can help determine if a statutory exception applies to your case.

Don't Wait—Take Control of Your Tax Situation

Ignoring an IRS notice will only make the problem worse. Interest and penalties will continue to grow until the balance is paid in full. The most important step you can take is to act quickly.

If you're an individual or business facing IRS penalties, you don't have to handle it alone. Houston Law PLLC is dedicated to resolving complex tax controversies and helping you navigate your obligations with confidence. We can assess your situation, determine if you qualify for penalty relief, and communicate with the IRS on your behalf.

Contact S. Houston Law today for a consultation and let us help you get back to focusing on what you do best—running your business.