Venise Maybank, MST, EA, discusses the different types of penalties and interest and how they are calculated on balance due from the taxing authorities. The webinar covers:
• Failure to File
• Failure to Pay
• Failure to Pay Proper Estimated Taxes
• Dishonored Checks
• Estimated Taxes
• Penalty Abatement.
Transcript (edited for clarity)
Good morning, my name is Venise Maybank and I am an IRS enrolled agent who acts as a tax advisor or tax professional. As an enrolled agent, I am an authorized practitioner empowered by the U.S. Department of Treasury. This allows me to represent taxpayers on all levels of the Internal Revenue Service, including audits, appeals and collection.
Over the years, I have had conversations with clients who may have at some point received a letter or notice from the IRS for several reasons, perhaps due to late payments or simply asking for information on an item from a return. Sometimes it’s hard to understand or interpret what the IRS is asking and that’s where a tax advocates can assist.
Let’s start with some of the types of notices that the IRS may send you. CP2501, which indicates a tax return discrepancy, is a request for clarification from the taxpayer regarding information on their tax return that doesn’t necessarily match the information that the IRS has on file. The taxpayer should contact the IRS immediately to explain the difference and correct the return.
Just a side note: There’s usually a deadline with these notices so it’s very important not to ignore these notices when you do receive them in the mail.
The deadline to respond to a CP2501 is usually 30 days from the date of the notice.
The CP2000 is the most typical notice. It’s generated if there’s a difference between what the taxpayer reported on the return versus what the IRS received from either an employer, banker, or other payer. This notice could result in a refund depending on the error on the return. It’s not a bill. Usually this will breakdown what was originally reported and what’s proposed by the IRS. If you’re in agreement with the broken-down information and allow the adjustment, you can sign the notice and remit. If you disagree, you are provided with the opportunity to present your information or present additional information to support what you’re not agreeing to.
Letter 12C is issued when additional information is needed. This could alert you to a missing signature, or the IRS needs to verify your income, or they need to verify that you are the taxpayer. With all the high fraudulent activities and identity theft happening, the IRS will sometimes send out this notice just to make sure that you are the actual person that is filing the tax return. This notice is a request for you to send additional proof of information that you are actually you. The reply with information can be sent by mail and to ensure the IRS receives the information in a timely manner, it is recommended that it is sent certified mail as proof of mailing.
Letter 3219. This is a notice of deficiency primarily stating that the IRS has determined you have underpaid taxes, or you have taxes showing an amount due. The taxpayer has 90 days to petition a determination or, if you agree with the changes in the notice, you are required to send in the full balance due along with a signed form 5564 Notice of Deficiency Waiver to the IRS. If you are not in agreement, you must respond to the IRS in writing and, of course, that has to be reasonable cause for the disagreement.
CP90 or CP504B is a final notice of intent to levy. CP90 is the IRS notice reminding the taxpayer of his or her unpaid taxes and informs the taxpayer that the IRS intends to levy that taxpayer. If the taxpayer wants to appeal this determination, then a form 12153 must be filed which is a request for a collection due process hearing. This must be done within 30 day.
If you request a collection due process hearing, the IRS will send you an initial notice with a 10-day deadline. If there is no response or no payment received from you, then the IRS will send out an independent levy letter.
Another side note: I’ve spoken with individuals who report having received a phone call from the IRS, an IRS agent, or from an IRS department saying that taxpayer owes taxes and will be locked up the next day. The IRS never calls taxpayers directly over the phone unless there is a case that’s already in place. But requesting information over the phone from the IRS? That’s usually not the case. They’re going to send you a letter to current address you have on file with them.
Now we are going to review some of the penalties that could follow the notices.
Failure to file is Revenue Code §6651. The failure to file charges the returns that are filed after the due date or extended due date. Some taxpayers still don’t file after October 15th and that’s when the IRS will come back and say, ‘You know what? We extended your time, but you didn’t your return on time. And so, because of that, you’re getting a failure to file penalty.”
Generally, the deadline to file a return is on April 15th. If this date falls on a Saturday or Sunday or on a holiday, you will have an extra business day to, which would probably be around the 17th or so. By requesting an extension, you receive a six-month extension time to file such return. There are some states that will allow an automatic six-month extension and the IRS should send them that extension. But sometimes a state doesn’t receive this information, so you need to make sure that you notify your state that you have filed an extension or send them a copy of your 4868, which is the form to file an extension. if have not paid whatever amount you are required to pay by April 15th, if the IRS has not received that amount by the due date, there will be a 5% of unpaid tax required to be reported. It may be reduced by failure to pay penalties by any amount where both penalties apply. Even if the return is received by the IRS, you’re still going to be charged 5% per month, up to five months.
Sometimes, the IRS will be lenient with penalties, but if they find that you’re not paying and that payment is not received by April 15, then you will be charged. Income tax returns are subject to a minimum wage filing penalty. If it’s more than 60 days, then the minimum penalty is lesser of the two amounts of 100% of the tax required to be shown on the return. If you didn’t pay on time or a specific dollar amount, then the adjusted annual inflation rate of $210 is applied for returns due between January 1, 2018 and December 31, 2019. For returns due after January 1, 2020, the rate is $215.
Some taxpayers do assume that filing a tax extension extends the time to pay. Do not fall back on a tax extension. That’s one of the biggest misconceptions out there to many taxpayers, “Because I filed an extension, I can pay October 15th.” No, that is not the case. If you prepared your return but you can’t pay it on time, many taxpayers first inclination is to request an extension and push the filing deadline back to October. It’s a great idea in theory, but you need to realize that it is a tax extension to simply give you more time to file, not to pay. If you’re if you’re working with a tax accountant or a CPA and you do feel you’re going to owe taxes or they have calculated your estimated taxes and you’re going to owe it is best to pay them by the deadline because, if you don’t, that’s when the fees are going to start to accumulate.
Failure to pay, Revenue Code §6651(A)(3). If you owe money to the IRS upon completion of your tax return, as I said before, it’s best that you pay this on time because if you don’t pay on time, then you will have a 0.5% of that tax not paid by due date in notice. The penalty accumulates each month or partial month in which you owe the IRS past the deadline of April 15th. So, it is 0.5% of each month or part of a month, up to a maximum of 25% of the amount of tax that remains unpaid until the due date of the return and taxes are paid in full. This is important: Each month that you go without paying your taxes, the amount continues to accumulate. If you do have an installment agreement with the IRS, then it’s up to 25%. And this brings us back to the intent to levy. If you receive a notice for having an amount due, if this amount is not paid within 10 days, the IRS is going to send you the levy because they haven’t heard from you, they haven’t received that payments, and their next step is to send the notice.
Failure to pay proper estimated tax, Revenue Code §6654. This occurs when you don’t pay enough taxes due for the year, or for your quarterly estimated payments or withholdings, or your W-2 only and your payroll company doesn’t withhold enough taxes by the end of the year. If you believe that you’re going owe taxes for a quarter, it would be best that you work with your CPA each quarter. If you’re required to pay taxes, then those quarters you have to make a payment.
Again, some people say, “Well, I don’t have to make a payment. I can wait until the end of the year.” But if the IRS is looking at your overall income for the year and if they’re expecting that you’re going to owe at least $1,000 in taxes after subtracting your withholding and refundable credits, then you are expected to pay quarterly taxes. Your CPA or your accountant can work with you and go over your tax planning to ensure that you’re not falling into that ballpark.
The penalty is calculated separately for each installment. If your income changes every quarter, it is best to pay the taxes accordingly within that time frame based on the income that you have.
Estimated taxes. In most cases, if you’re in that category of paying taxes, it’s best that you start planning ahead of time to make sure that you’ve accounted for everything. Unfortunately, sometimes, yes, we do plan for estimated taxes, but sometimes we may forget some forms, or we may forget that we made contributions or whatever the case and our numbers may be slightly higher than what you worked out with your CPA. The fourth quarter payments are due January 15th so be sure to cover all your taxes then that were due for the previous tax year.
How do we calculate these taxes? After subtracting your withholdings and refundable tax credits – expect your refundable credits to be the lesser of 90% of the tax shown last year’s return or 100% of the tax shown on this year’s return.
Your tax return must cover all 12 months of the year, and your tax accountant will use last year’s numbers to project the amount that will be owed each year. If you didn’t pay enough withholding, they can estimate that amount for you so that you can pay enough in the next quarter. When determining taxes owed, sometimes they will use the form 1040X, or estimated tax payments.
So, when do you make these payments? Again, these are due every quarter and generally the dates are April 15th, June 15th, September 15th and January 15th of the following year. And as I said earlier, if the date falls on a holiday or on the weekend, then the payment the business next day.
Interest payments that the IRS charges is are on late and unpaid taxes. And the period covered always begins with the original due date on the return, and it ends with the receipt of payment to the IRS. You may incur interest for late filing or simply making a mathematical error on your return. If you’re preparing your returns by yourself, you need to make sure the math on your return is correct. If it’s not and you do owe more, the IRS is going to use that number and you will incur interest. And the IRS will charge interest regardless of cause.
Generally, the IRS does not waive interest. There is a better chance they will waive a penalty because of the federal laws. The interest rate on unpaid federal tax is determined every three months and they tend to change over the short-term and the rate is has been decided plus 3%. And they compound daily. So remember, if you owe and you’re trying to calculate how much interest is being charged, it is compounded daily.
Another thing I want to kind of discuss, and I know this is not a huge issue for a lot of people, but sometimes we do come across cases where the IRS has received a dishonored check or other form of payment, according to Revenue Cold §6657. It is highly recommended for you to file your taxes online and also pay online with your return that’s been submitted. Not that the IRS does not like you to mail in your tax returns, but if you have to mail it in with a payment, filing online eliminates you from forgetting that you made a payment that has to clear. If they do receive a payment with insufficient funds, the penalty on any amount greater than $1,250 is 2% of the amount of payment. If you do get this notice, it will tell that you still need to pay your taxes with added interest, and they’re also going to charge 2% on top of that payment.
If your payment is less than $1,250, the penalty on the amount is going to be the amount of payment or $25, whichever is less.
If the IRS is going to charge you penalties or interest, they will work with you. And often, a lot of these penalties are removed because we have a reasonable cause. The law lets them remove or reduce the penalty if you are able to provide reasonable cause. If you believe that these reasons are acceptable, then you will sign a statement explaining for the IRS why you couldn’t pay your taxes why your taxes are late. This is a one-time event the IRS will allow you. But if you’re late every year, and you’re expecting an abatement each year, no, you won’t get another abatement. It is given as a one-time waiver.
Businesses also get penalties for not filing their returns on time, but the IRS is also lenient in removing penalties for business. What they generally do first, will be to review your history, meaning your history of compliance, especially as it relates to payroll. If you do own a company, you have payroll and your payroll reports are not up to date, they will ask you to come into compliance before they even consider waiving the penalty.
I’ve seen cases where we’ve requested penalty abatements, but the reports are missing a quarter for payroll filing and so it is recommended you work with your payroll company or, if you are the one responsible for filing those reports quarterly, check to make sure that you are in compliance and everything is on time.
Some of the reasonable causes that can be presented to the IRS include if you had a causal event, a disaster or other unusual circumstance. In these cases, it would be inequitable to impose a penalty if you’re for example, if for example, you retired, or became disabled during the tax year or preceding year for which you should have made estimated payments. The underestimated payment was not willful or neglectful. Sometimes there is merely the inability to accurately to estimate income because of the breadth of changes enacted by tax reform resulting in the inability to calculate payments effectively.
The IRS is pretty lenient on that level. And if you haven’t had an abatement and it’s your first time, they’ll review your accounts and usually automatically approve it. Sometimes the IRS will send a form 843. This form should be remitted if you have already paid your penalties and would like to have your files reviewed and receive a refund. You will need to have your CPA or an enrolled agent contact the IRS on your behalf and will probably need to provide a form 8821or power of attorney form, form 2848. This will give them the authorization to contact the IRS on your behalf regarding the waiving of penalties.
Timing is of the essence in getting this done, otherwise the penalty can and will increase. As soon as you receive those notices – some have a 30-day deadline, some 90-days, others as soon as 10 days – if you believe you can get the penalties abated, it’s best to contact them right away. Be sure to be clear and concise with your reasons and if you do have supporting documentation that is needed, submit it in a timely manner as well.
Your practitioner may charge a contingent fee for service, especially if it’s not in connection with your taxes or if it’s not a fault of theirs. And if they’re calling them on your behalf, then they’re allowed to charge a contingent fee for service.
I want to remind you that the IRS does not abate interest for reason cause because interest is charged by law and it will continue until the account is fully paid. When I do get an abatement for clients, they will usually receive a revised bill that shows the abatement credited, but it will still have an interest amount that is due. When you send in your payment with interest, the IRS will then send you a revised letter with a zero-balance due.
If you have any questions, contact Tax Saving Professionals at (772) 257-7888.