One of the most stressful things to deal with as a taxpayer is receiving a notice from the IRS stating that you have penalties assessed against you. Not only can these penalties be financially burdensome, but they can also have long-term consequences on your credit score and overall financial health.

Fortunately, there are tax attorneys in NYC who specialize in penalty abatement services that can help you reduce or eliminate these penalties.

This article will discuss the most common types of tax penalties, the penalty abatement methods available, and examples of “reasonable cause” for penalty abatement.

Most Common Types of Tax Penalties

The IRS imposes various penalties for different violations of tax law. Some common tax penalties are:

• Failure-to-file penalty: This penalty is set when a taxpayer fails to complete filing a tax return by the due date, including extensions. The penalty is typically 5% of the unpaid taxes every month, up to a maximum of 25% of the unpaid taxes.

• Failure-to-pay penalty: When taxpayers fail to pay the taxes due by the due date, they get penalized. The penalty is usually 0.5% of the unpaid taxes per month, up to 25% of the taxpayer’s unpaid taxes.

• Accuracy-related penalty: This is given when a taxpayer makes a mistake on their tax return that results in an underpayment of taxes. The penalty is usually 20% of the underpayment.
• Underpayment penalty: This happens when a taxpayer fails to pay the estimated taxes due throughout the year. The penalty is usually 0.5% of the underpayment for each month, up to 25% of the underpayment.

What Penalty Abatement Methods Are There?

There are various methods of penalty abatement that a taxpayer can use to reduce or eliminate tax penalties. These methods include:

Reasonable Cause

This is the most common method of penalty abatement. To qualify for reasonable cause, a taxpayer must show that they practiced ordinary business care and prudence but still could not comply with the tax law. Examples of reasonable cause include natural disasters, death or serious illness of the taxpayer or their immediate family, and reliance on incorrect advice from a tax professional.

First-time Penalty Abatement

This method is available to taxpayers without any penalties in the past three years. To qualify, the taxpayer must have filed all necessary returns and paid or arranged to pay any taxes due.

Statutory Exception

This method is available to taxpayers who can show they were not required to file a return or pay taxes under the law.

Administrative Waiver

This method is available to taxpayers who can show that the penalty was assessed due to an IRS error.

Examples of “Reasonable Cause” for Penalty Abatement

To give you a better idea of what constitutes “reasonable cause” for penalty abatement, here are some examples:

• Natural disasters: If one cannot file or pay their taxes due to a natural disaster such as a hurricane or earthquake, they may qualify for reasonable cause.
• Death or serious illness: If a taxpayer or their immediate family member passes away or becomes seriously ill, preventing the taxpayer from complying with tax law, they may qualify for reasonable cause.
• Incorrect advice: If a taxpayer relies on incorrect advice from a tax professional, resulting in a penalty, they may qualify for reasonable cause. However, the taxpayer must show that they provided the tax professional with all the necessary information and that the advice was reasonable.

Conclusion

Penalty abatement services can be a lifesaver for taxpayers struggling with IRS penalties. By understanding the most common types of tax penalties, the methods of penalty abatement available, and examples of “reasonable cause” for penalty abatement, taxpayers can make informed decisions about their tax situation.

If you are facing IRS penalties, consider consulting with one of the best tax attorneys in NYC who specializes in penalty abatement services to explore your options.

Law Offices of Stephen B. Kass, P.C. is a New York-based legal and CPA firm specializing in tax settlements, IRS litigation and negotiations, and business bankruptcy services. Contact us and set an appointment with a trusted New York tax attorney today!