Are you a tax professional who feels overworked, underpaid and unappreciated by your clients during tax season? You reach out, encouraging them to provide their documents early so you have time to prepare their return without rushing and risk making a mistake, only to have them submit their information a few days before the tax deadline. This happens not only for the April deadline, but also with tax extensions in October, which is perhaps more problematic than the April deadline. After Oct. 15, the IRS will assess late filing and late payment penalties, in addition to interest if there is a balance due on the return.
At some point in our careers, we all have experienced the frustration of dealing with clients who are difficult to work with, especially those who miss important deadlines. These are the same clients who don’t seem to understand why they are being penalized and expect you, as the tax professional, to create a miracle for them.
What Are the Penalties?
The consequences of missing an IRS deadline can be minimal or quite severe depending on the client’s situation. A client who files a late tax return, and has no tax liability or is due a tax refund, won’t be assessed a late filing penalty. However, a client who files a late tax return with a balance due will be assessed late filing and late payment penalties beginning the day after the tax return filing deadline.
The failure-to-file penalty is generally more than the failure-to-pay penalty, which is 5 percent of the unpaid taxes for each month or part of a month that a tax return is late, but will not exceed 25 percent of the unpaid taxes. In addition, the taxpayer will be assessed a failure-to-pay penalty of half of 1 percent of the unpaid taxes with a maximum penalty of 25 percent. That penalty applies for each month or part of a month after the due date, and starts accruing the day after the tax-filing due date. However, if the 5 percent failure-to-file penalty and the half percent failure-to-pay penalties apply in any month, the maximum penalty for both is 5 percent per month.
For example, a taxpayer who doesn’t file an extension on April 15 and comes to your office for tax preparation in November will max out at 25 percent for failure-to-pay penalty, and will be assessed the half of one percent failure-to-pay penalty for the remaining months until the maximum of the 25 percent limit is reached. So, let’s say the taxpayer files a late tax return without an extension and has a $5,000 tax liability. Here, the failure-to-file penalty will max out at $1,125 and the failure-to-pay penalty will be $200 for eight months of April to November. The the taxpayer also will be assessed interest at a rate of 5 percent based on current interest rates.
Situations often arise with clients who file their tax return late or provide their information for preparation at the 11th hour, putting us, as the tax professional, in a bind. There is only so much we can do to assist them if they procrastinate. When the taxpayer files a tax return late, we should assist them with submitting a penalty waiver request to the IRS. The outcome of the penalty wavier request will be determined on the individual’s facts and circumstances, and if there is reasonable cause. A person who files a late tax return due to a hardship, such as health issues, job loss, family death, casualty or disaster loss, or financial crisis, would qualify for a penalty waiver since they have reasonable cause.
A taxpayer who files a late tax return simply due to procrastination may also qualify for a penalty waiver under the first-time penalty abatement guidelines. To qualify for this, reasonable cause isn’t required. The only requirement is a good compliance history during the three previous tax years. If the taxpayer has filed their tax return timely and paid timely during the three previous years, they will automatically qualify for the first-time penalty waiver.
Although the penalty waiver is automatic and available to all taxpayers who have a good compliance history, a request for the penalty waiver has to be submitted to the IRS. The request can be made over the telephone and doesn’t necessarily have to be in writing. You can contact the IRS and request a penalty waiver with the first-time penalty abatement; the representative will process it and provide the results over the phone. If the taxpayer qualifies, the IRS will mail a letter granting the penalty waiver. The first-time penalty abatement should be used when a penalty is assessed and there is no reasonable cause. The first-time penalty abatement option is available regardless of the dollar amount of the penalty.
This option is a great tool you have available to help your clients when necessary, and one that will be needed in 2019, considering the IRS expects millions of taxpayers to have a tax liability due to the new withholding tax tables.