Failing to file a personal tax return on time carries with it a 5% penalty per month, maxing out at 25%. Filing to pay personal taxes on time initially brings with it a .5% penalty per month, also stopping when it hits 25%. If both penalties apply, the maximum monthly liability of a taxpayer is 5%.
Penalties can almost always be abated if the taxpayer has reasonable cause. What has to be shown is that despite exercising all reasonable business care and prudence, he or she could not file and/or pay on time.
Penalties are often canceled if the taxpayer can show a hardship, such as significant medical issues or natural disasters. Basically we look at everything in the individual’s life that prevented them from timely complying with the law.
What the IRS does not publicize is that a citizen with a good compliance history of filing and paying on time for 3 consecutive years is eligible for a First Time Penalty Abatement. This can often save thousands of dollars. Of course, as with other tools that benefit the taxpayer, you must know to ask for the abatement. They will not volunteer it.
There are very few scenarios where the IRS will cancel interest. Reasonable cause is not a valid reason. When penalties are abated, the interest on the penalties also goes away.
The IRS has rules that they must follow. There is the Internal Revenue Code. That is the law and whether they like it or not, they must follow it. They also have the Internal Revenue Manual which they follow 100% of the time as long as they like what it says. When they do not like what it says, they follow it 0% of the time. The Manual contains their rules and guidelines, but it is this not the law, meaning taxpayers are not bound by it. It is my job as a Tax Attorney to hold their feet to the fire and make sure that they comply with the law and follow their own procedures.
The key to dealing with the IRS is to get someone’s ear. That is someone that you can talk to that has authority to make a decision. The 1-800 number generally yields very limited results. A Tax Practitioner must know the rules and know how to find the person who can solve a problem.
As a general rule, individuals at the IRS are nice people. Of course, as in any business or profession, there are good people that are easy to deal with and bad people that are nasty and difficult. Most of them just want to make an agreement so that they can close their file. They know that when I send them my Power of Attorney, I am just working to resolve the issues and trying to make a deal that is in the taxpayer’s and the IRS’s best interests.