With the advent of the 2013 tax season, it is expected that most taxpayers will exercise ordinary care and prudence in filing their returns and thereafter paying all taxes due. Assessed penalties for failure to file (FTF) or failure to pay (FTP) can be steep, with fines in both cases able to reach 25 percent of the unpaid taxes if these issues are not resolved in a timely manner. As explained in a recent report from the Treasury Inspector General for Tax Administration, however, these penalties are not intended to increase overall revenue collection but rather to encourage voluntary compliance with IRS filing and payment deadlines.
As such, there are many avenues available for relief to otherwise well-meaning taxpayers who have, for one reason or another, failed to meet these deadlines. For example, taxpayers who have "reasonable cause" for missing such deadlines owing to a sudden and disabling illness or a natural disaster may have their penalties abated. Penalty assessments, furthermore, are prohibited on taxpayers residing in combat zones, while taxpayers who are newly retired, disabled, or had a tax penalty of less than $1,000 in the prior year are eligible for an exception to estimated tax penalties. Penalties may also be waived in advance of litigation or because of a policy statement explicitly affording such relief, such as the "Expanded Fresh Start" initiative of 2012.
Finally, and most notably, the IRS waives FTF and FTP penalties for taxpayers demonstrating full compliance over the prior three years. This "First-Time Abate" (FTA) is intended to "reward tax compliance while promoting tax compliance," yet the Treasury Inspector General's report found that "approximately 250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP penalties did not receive penalty relief "despite qualifying for such, with "more than $181 million" in penalties going unabated. Furthermore, some taxpayers who qualified for relief under "reasonable cause" standards instead received FTA waivers, a decision which can negatively impact their future tax status.
Dealing with penalties of this sort can be a complicated matter, and, as the Treasury Inspector General noted, an improper understanding of one's situation as regards the appropriate method of relief could have significant long-term repercussions. For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bellevue-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.