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TIGTA finds 1.45 million eligible taxpayers did not receive penalty waivers

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Penalties for failing to file tax returns and failing to pay on time can add up quickly.  The Treasury Inspector General for Tax Administration (TIGTA) recently discovered that the IRS did not inform some taxpayers that they were eligible for waivers of these penalties.  According to TIGTA, some 1.45 million taxpayers could have had their penalties waived under the IRS’s First-Time Abate program if they had known about the program.

Penalties

If an individual fails to file his or her return by the due date (including extensions), the IRS may impose a failure to file penalty.  The failure-to-file penalty is generally five percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions). If a taxpayer files his or her return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on the return.

The IRS also may impose a failure to pay penalty of ½ of one percent of the unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. The failure to pay penalty increases to one percent per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after notice of intent to levy certain assets is issued.

The two penalties are interrelated. For any month that both the failure-to-file and the failure-to-pay penalties apply, the failure-to-file penalty is reduced by the failure-to-pay penalty for that month unless the minimum failure-to-file penalty is charged.

Waivers

The IRS may abate a penalty if a taxpayer can show that he or she exercised ordinary care and prudence and failure to file or pay was due to reasonable cause and not willful neglect.  In 2001, the IRS began waiving failure to file or pay penalties administratively under the First-Time Abate program.  TIGTA reported that the IRS would waive failure to file or pay penalties for taxpayers who had timely filed and paid their taxes for the past three years.

Eligible Taxpayers

TIGTA reviewed the First-Time Abate program and discovered that not all taxpayers with compliant tax histories received first-time penalty abatement. According to TIGTA, approximately 1.45 million qualified taxpayers were not told about the First-Time Abate program. The IRS collected around $180 million in penalties from these taxpayers, TIGTA reported.

Recommendations

TIGTA recommended that the IRS make participation in the First-Time Abate program contingent on taxpayers paying their current liability. TIGTA also suggested that the IRS review the interaction between penalty waivers the First-Time Abate program and penalty abatement for reasonable cause.  The IRS agreed with TIGTA’s recommendations.

If you have any questions about IRS penalties, please contact our office.