Lawrence Lawler: Hello! I am Lawrence Lawler, National Director of the American Society of Tax Problem Solvers. This series is on how to prepare for an IRS audit.
The topic we are going to cover now is the most pleasant of all and is of interest. The one thing that everybody says makes their tax bill go out of control are the excessive penalties that IRS adds to anybody's tax bill when it goes unpaid for any period of time.
The first penalty we will discuss is the failure to file penalty. It's a very common penalty, but it's also one of the most costly because it's 5% per month of the unpaid tax on the tax return. So the IRS can accumulate that penalty up to 25% in a very short period of time.
The other very common penalty is the failure to pay penalty. That penalty runs at a half percent per month, and it too can accumulate to a total of 25%. Now, you can tell by the difference in those two penalty amounts that the IRS is far more serious about having you file rather than even having you pay, because they want that return so they know how much you owe them. Then they worry about collecting it afterward, and they are pretty good at collecting it. So it's not really a problem, but the two penalties combine can easily accumulate to 50% total.
The IRS has another penalty; actually I shouldn't just say it that way. The IRS has hundreds of penalties. But, I am talking about just the most common ones now, and one that comes out of many audits is what they call the accuracy related penalty.
That penalty is 20% of the tax that was not properly paid, and there are times when a good representative maybe able to negotiate that penalty away for you based on the taxpayer's good intent, their lack of tax sophistication, and that sort of thing. But, it is a commonly assessed penalty based on 20% of the amount of tax that was not paid on time.
There are two different types of fraud penalties. There is a civil fraud penalty which is 75% of the unpaid tax, and a criminal fraud penalty. By the way, they can both be assessed at once, but the civil fraud penalty; they take the amount of tax that has not been properly paid and remitted and charge you 75% of that amount as an addition to the tax. Of course with criminal fraud, you could end up that being a criminal situation, you could end up with imprisonment as well as the penalty as being charged.
The IRS charges interest on the unpaid tax until the day it is fully paid. Believe it or not, they also charge interest on all of the penalties. So if you are running up an IRS tax bill by not properly paying them and they are assessing penalties on it, keep in mind they are also at the same time accruing interest on the tax, and on the penalties. So this is one of the reasons why the tax liability of so many taxpayers grows geometrically to the point where they feel terribly frustrated they can never ever get back to even because the penalties are so great.
There is the possibility of requesting the IRS waive penalties in some situations, but the taxpayer has got to have reasonable cause for that to take place. That's a subject of another day. So, that covers pretty much all of the topics that are important to you when it comes to dealing with the preparation, and the follow through and the actual confrontation with the IRS relative to having your tax return audited.
I hope this information helps you in the event that you are one of the lucky few who gets selected for the audit by the IRS. Remember that every single tax problem has a solution and if you need professional help and you are looking for a referral, contact the American Society of Tax Problem Solvers, they will be happy to give you referral to a qualified professional. Thank you and good luck.