The IRS and Comptroller of Maryland use penalties to encourage voluntary compliance with tax deadlines. Sometimes situations arise that cause a taxpayer to miss a filing deadline or payment. If the taxpayer has a reasonable explanation for missing a deadline or payment and qualifies for a penalty abatement, the IRS or Comptroller of Maryland may waive the penalty. If one of these authorities has assessed a penalty or you know they are getting ready to assess a penalty, you have options. There are ways to appeal the penalty, if it has already been assessed, or avoid it all together, if it has not.
Tax Penalty Abatements
IRS Penalty Abatement & First Time Penalty Abatement Policy
The IRS may provide administrative relief from a penalty by reducing or removing it entirely under its First Time Penalty Abatement Policy. Taxpayers may qualify for relief from penalties for failing to file a tax return, failing to pay on time, failing to deposit taxes when due, and other applicable penalties. The first time penalty abatement waiver can only be used once every four years. If you have multiple periods with penalties, it is important to use the waiver strategically for the period that will get you the most benefit.
Qualifying for the First Time Penalty Abatement Waiver
To qualify for the first time penalty abatement waiver, the taxpayer must meet certain criteria including: not previously required to file a tax return or has had no penalties applied for the past three years; filed all current tax returns on time or filed an extension; and paid or made arrangements to pay any taxes due. If you meet the criteria, the IRS will abate the penalty.
If you can show reasonable cause for missing the filing or payment deadline, you may qualify for the penalty to be abated as well. Even if you have used the first time penalty abatement waiver, you could still qualify for a penalty abatement, if you can demonstrate reasonable cause for missing the filing or payment deadline.
Tax Penalty Abatement for Reasonable Cause
Reasonable cause is difficult to prove and requires more work. Whether or not you had reasonable cause for missing the deadline will be determined based on all the facts and circumstances of your situation. The IRS will consider any sound reason including: disasters; inability to obtain records; death, serious illness, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family; and many other reasons. The IRS requires reasonable cause to demonstrate you, as a taxpayer, “used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.” Unlike the first time penalty abatement waiver, which is based on whether or not you meet the criteria, arguing reasonable cause for missing a deadline requires the IRS to make a judgment on whether or not you qualify for the abatement.
Maryland Tax Penalty Abatement / Waiver
In Maryland, a tax collector can waive both interest and/or penalties. As with the IRS, taxpayers must meet certain criteria, including being current on their tax filings.
Civil Fraud Penalty
If the IRS determines that a taxpayer’s underpayment is attributable to tax fraud, it can assess a civil fraud penalty equal to 75% of any portion of an underpayment of taxes attributable to tax fraud. If the IRS determines that an underpayment was attributable to fraud, it will assess the 75% penalty on the entire amount of the underpayment unless the taxpayer can establish by a preponderance of the evidence that a portion of the underpayment was not attributable to fraud. This means the taxpayer will need to prove that the civil fraud penalty should not apply to the entire amount of the underpayment.
Maryland has its own tax fraud laws that apply to Maryland taxpayers. The Comptroller of Maryland will assess a civil fraud penalty in an audit if badges of fraud are present. The civil fraud penalty in Maryland can be up to 100% of the unpaid tax.
In each field or office examination, IRS agents review whether potential penalties are applicable to tax preparers. After the audit is complete, if appropriate, IRS agents will open a penalty investigation in regards to the tax preparer to determine if preparer penalties should be applied. If a penalty is applied, the agent will provide a detailed report to the preparer, and the preparer will have 30 days to request an appeal before the penalty is assessed. This gives the tax preparer a limited amount of time to mount their defense.
If you have been assessed a preparer penalty, do not delay. Contact Maryland tax attorney Jim Liang for a free consultation.
Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty (TFRP) applies to taxes a business owner holds “in trust” for the federal government. Payroll and excise taxes are the two most popular taxes that business owners are required to hold “in trust.” Business owners collect these taxes from employees and customers but are required to pay them to the United States Treasury.
Non-Payment of Payroll Taxes
Payroll taxes are deducted directly from an employee’s pay. Payroll taxes include federal income, Social Security, and Medicare taxes. Business owners may be required to withhold additional taxes, for example state and local taxes, but these taxes are not paid to the United States Treasury. Even if employers do not make their payments of these taxes, the IRS is still required to pay any income tax refund owed, regardless that the IRS never received the funds held in trust. Because of this liability for the IRS, it takes the underpayment or nonpayment of these taxes very seriously.
Non-Payment of Excise Taxes
Excise taxes are taxes paid on specific goods and usually are included in the price of the product. Usually, these goods are considered unnecessary and/or detrimental to people’s health. This is how these taxes get their nickname the “sin tax.” These products are usually limited to alcohol, tobacco, and gasoline but can include other products.
If business owners do not make the deposits for these taxes, the IRS will attempt to hold liable anyone who is listed as an officer and anyone who has check-signing capabilities. And the Trust Fund Recovery Penalty allows the IRS to hold owners and employees personally liable for the unpaid taxes if they serve in one of these roles and the IRS determines they were “willful and responsible.”
If you are facing an IRS or Maryland tax penalty, contact Jim Liang. Jim will review your individual situation and discuss the options available to you. Jim can:
✓ Determine if you may qualify for an abatement to reduce or remove the penalty
✓ Challenge or appeal a finding that you committed fraud
✓ Advise you with regard to TFRP matters including Trust Fund Interviews
Your time to negotiate or challenge a penalty may be limited. Contact Jim today for a free consultation. He can review your options for your best course of action to prepare your legal defense.