On October 31, 2012, the Internal Revenue Service (IRS) announced that taxpayers and tax preparers have been given until November 7 to file returns and accompanying payments. The relief was issued specifically for those in the areas of the Mid-Atlantic and Northeastern United States that were affected by the storm or by Hurricane Sandy. The announced relief is automatic and does not require filing waivers or extensions. Continue reading
Category Archives: Failure to File Penalty
How to Get Rid of a Tax Problem? Go Country.
Didn’t it feel random that music icon, Lionel Richie, came out with Tuskegee? Tuskegee is a collection of hits recorded with country music’s biggest names. Richie’s duet partners included Jason Aldean, Kenny Chesney, Tim McGraw, Rascal Flatts, Blake Shelton, Darius Rucker, Billy Currington, Shania Twain, Kenny Rogers, and Willie Nelson.
To promote the album, CBS aired a special concert event recorded at MGM Grand Garde Arena where an army of superstars saluted the icon. But why? Why has this R&B and pop legend gone country? I think we may have found the answer.
Hello? Is it me you’re looking for?
Yes! On April 2, 2012, the IRS filed a Notice of Federal Tax Lien for a 2010 income tax liability in the amount of $1,130,609.11.
When you owe the IRS back taxes, a tax lien arises automatically which is known as a “secret” lien. The tax lien arises as a matter of law against a taxpayer without the necessity of filing a public. However, the statutory or “secret” lien is not effective against any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until a Notice of Federal Tax Lien has been filed. By filing a Notice of Federal Tax Lien, Lionel Richie’s creditors are publicly notified that the IRS has a claim against a taxpayer’s property, including property acquired after the lien is filed.
I guess it wasn’t “easy” to get money from the Commodores, his ex-bandmates (joke rimshot). Therefore, the only other solution: Going Country. Tuskegee debuted at No. 1 on Billboard‘s country albums.
A tax lien can have devastating consequences such as tarnishing a taxpayer’s credit, making it difficult to refinance and borrow against property, impairing title, and in some cases, the loss of a job. If you have been notified by the IRS that it has or is about to file a tax lien against you, the Law Offices of Todd S. Unger, Esq., LLC may be able to help. Call us today at (877) 544-4743, or fill out a contact form and request a consultation.
When to Submit a Reasonable Cause Request for the Failure to File Tax Penalty
If a taxpayer does not file by the due date, then they are subject to the failure to file penalty unless they can show that any delay was due to reasonable cause and not willful neglect. Accordingly, it is essential that every taxpayer knows tax deadlines. The IRS provides a list of 2012 tax calendar due dates (click here to view list).
The Failure to File Penalty and Non-Pass-Through Entities
The failure to file penalty runs at 5% per month, up to a maximum of 25%. Additionally, the IRS will tack on a fee of the lesser of $135.00 or the amount of tax due. For a greater understating of the failure to file penalty see our blog on November 7, 2011 titled I Cannot Pay the Tax Reported on my Tax Return. Should I file?
The Failure to File Penalty for Pass-Through Entities
The failure to file penalty has a different application with pass through entities. A pass through entity, such as a partnership or S-Corp, “passes through” taxable income to its owner and pays not taxes. For example, a partnership files its own tax return and then distributes income and distributions to its partners through the use of a K-1. Each partner then reports his/her share of income and distributions on a Form 1040.
The penalty on a pass through entity is $195 for each month or part of a month, up to a maximum of 12 months, the failure continues, multiplied by the total number of partners/shareholders during any part of the tax year. Accordingly, the penalty maxes out at $2,350.00 per partner or shareholder.
When to Submit a Failure to File Penalty Abatement Request in 2011
The 2011 instructions to Partnership Returns (Form 1065) and S-Corp and Corporations (Form 1120-S and Form 1120, respectfully) direct taxpayers to wait until they receive a late filing notice from the IRS before sending a reasonable cause explanation. In earlier years, taxpayers were instructed to attach the explanation to the late filed return. Individual taxpayers should include a reasonable cause explanation with Form 1040.
Todd Unger, Esq. is a tax attorney devoted to resolving tax disputes and has helped taxpayer’s remove or reduce penalties. If you need help applying for tax penalty reductions, aka penalty abatement, please contact us today!
I Cannot Pay the Tax Reported on my Tax Return. Should I file?
Reply
In short, the answer is YES!
In order to understand why you must file, it is important to grasp the penalties associated with failing to timely file.
IRS Failure to File Tax Return Penalty
The IRS’s failure to file penalty runs at 5% per month, up to a maximum of 25%, or fraction of month that the return is filed after its due date. Accordingly, if the penalty maxes out, you will owe an additional 25% of the tax due.
In addition, the IRS will tack on a fee of the lesser of $135.00 or the amount of tax due.
For example, if a taxpayer owes $100,000.00 and the penalty maxes out, the taxpayer will owe an additional $25,135.00. To make matters worse, interest accrues not only on tax, but also on the penalty. This causes an IRS tax problem to spiral out of control.
The failure to file penalty is reduced by the failure to pay penalty, example below, when the two penalties run concurrently.
Most importantly, the failure to file can lead to serious non-monetary consequences. The failure to file is a misdemeanor punishable up to one year in jail as well as a fine of not more than $25,000 ($100,000 in the case of a corporation). Even worse, a taxpayer who fails to file returns for multiple years commits a separate misdemeanor offense for each year.
The IRS Failure to Pay Tax Penalty is Not an Extension to Pay
An extension of time to file is not an extension to pay taxes owed. Therefore, if you owe tax it must be paid in full by the due date excluding extensions. If you do not timely pay the tax in full, the Internal Revenue Code imposes a penalty of 0.5% per month, up to a maximum of 25%, for late payment.
For example, if the due date for a tax year is April 15 and you file a valid extension, the return will be due on October 15; however, if you owe money, you will be subject to the failure to pay penalty which is assessed on April 15, the due date.
The failure to pay penalty increases to 1% per month if the taxpayer does not pay within 10 days of a notice of intent to levy. The amount of unpaid tax subject to the penalty is reduced by the amount of any tax which is paid on or before the beginning of a month.
Interest on the failure to pay penalty begins to accrue if the taxpayer receives notice and does not pay.
If you negotiate an IRS Installment Agreement, the 0.5% penalty is reduced to 0.25%. This reduction is allowed only if you filed a timely return.
Application of IRS Failure to File and Failure to Pay Penalty
Below is an example of how the failure to file and pay penalties would be assessed if the applicable federal interest rates vary between 3% and 4%.
Example
On April 15, 2011, Taxpayer does not file an extension and owes $100,000.00 of tax. On November 2, 2011, Taxpayer would be subject to the following penalties:
Failure to File: $22,500.00
Please note, the failure to file penalty, $25,000.00 (5 months late), is offset by the failure to pay penalty of $2,500.00 (5 months late) to derive at $22,500.00.
Failure to Pay Penalty: $3,500.00 (7 months late at .5% rate)
Interest: $2,227.06 (Interest rates of 3% to 4%)
Penalty Interest: $501.09 (Interest rates of 3% to 4% based on the Failure to File Penalty)
Total: $128,728.15 (includes the minimum failure to file penalty which is $135.00)
In the same example, let’s assume you filed a tax return:
Failure to File Penalty: $0.00
Failure to Pay Penalty: $3,500.00
Interest: $2,227.06
Penalty Interest: $0.00 (example assumes IRS did not send the Taxpayer notice)
Tax Savings: $23,000.00
Conclusion
While it is true it may take the IRS longer to find you if you do not file a tax return, you will save yourself money and avoid any potential, although rare, criminal exposure. With both penalties maxing out, the taxpayer faces an additional 50% of tax plus interest. Therefore, if you owe tax, it is essential you timely file your tax return.