Lollipops And Hummingbirds: Penalties & Interest

Image showing penalties & interest stamps - The Complex Tax Law Firm, LLCI often liken strategies that promise to remove or abate penalties and interest to “lollipops and hummingbirds.” Of course, it would be wonderful if everything in the tax world were as delightful as lollipops and hummingbirds – you could even throw in rainbows and unicorns for good measure. However, that’s not the reality.

The IRS isn’t in the business of casually waiving penalties or interest when you don’t pay on time. In fact, their primary mission is to collect as much money as possible, and that’s the core of their ethos and operations. So, when a client approaches and hopes to have all their penalties and interest wiped away, it’s important to understand that the IRS is not inclined to do that. You have to keep in mind that these penalties are designed to incentivize everyone to pay their taxes on time and correctly.

Penalty And Interest Abatement Strategies

At times when I am discussing removal of liabilities with clients, I explain that if I had a drawer full of penalty abatements that I could simply send in to get everyone’s penalties removed, I’d be retired by now. Unfortunately, it doesn’t work that way, but this doesn’t mean we can’t get penalties removed in some cases, and in certain situations, we can also have some interest removed. Still, there are strategies that allow you to work within the IRS structure to save as much money as possible.

For example, I worked with a client who hadn’t filed a return since 2016. We utilized a tax structure where, if you file a return and haven’t had tax issues for three years prior, you can include a form with your tax return to request the removal of penalties and interest. We structured it so that he filed one return first, got the penalties removed, and then filed subsequent returns at three-year intervals. By using these “first-time abatement” strategies, he ended up saving tens of thousands of dollars in penalties. If we had filed them all at the same time, we would have only qualified for the first-time abatement on one of the returns.

Another option is to submit a “reasonable cause request” where you acknowledge your mistake but explain that there were circumstances beyond your control that led to late payments or filings.

For example, I had a client who was a race car driver and owed a significant amount of money. The tax issues were a result of an unforeseeable problem with one of their car suppliers, which prevented them from racing. When they couldn’t race, they couldn’t earn money, yet they were still incurring expenses for their racing team. I filed a reasonable cause request for this client arguing that they couldn’t have foreseen the situation that prevented them from participating in races and earning substantial income. In the end, we successfully got around $190,000 in penalties removed.

In general, the IRS will consider removing penalties when you can demonstrate that the circumstances were completely out of your control, and you acted as a reasonably prudent business person to fulfill your tax obligations. However, stories like “I had a bad year, so I chose not to pay my taxes” will carry less weight in these situations.

What To Do If You Disagree With Penalties Or Charges

If a business believes that they’ve been inaccurately assessed penalties or fees, there are avenues for appeal. One option is to file an appeal based on “doubt as to liability, where you challenge the accuracy of the penalties or charges themselves, stating that you don’t believe you owe them.

Additionally, if you believe the penalties are justified but you’re experiencing financial hardship, you can explore an “Offer in Compromise,” which allows you to offer the IRS an amount less than what you owe, based on your financial situation.

Impact Of Penalties And Balances On A Company’s Financial Stability

Penalties can be particularly burdensome because they can be significant and often accumulate over time. These penalties can also compound with interest charges, making the total amount owed much larger. As such, it’s important for business owners to understand that when they owe the IRS, they typically owe the entire amount, including penalties and interest.

This can have a significant impact on a company’s financial stability, as it may lead to cash flow issues and strained resources. However, it’s crucial to remember that panicking or shutting down the company is rarely the best solution. The best approach is to look at the situation rationally and work on a plan to address the outstanding liabilities over time.

Relief Options For Businesses Impacted By Natural Disasters Or Economic Downturns

In cases of natural disasters or economic downturns, there are often tax relief options available to those who are impacted. For example, if a business is located in an area affected by a hurricane, wildfire, or another disaster, they may be granted extensions for filing tax returns or paying taxes. This is typically based on proof of the location and the extent of the disaster’s impact.

Economic downturns, such as those experienced during the COVID-19 pandemic, have also led to certain relief measures. Many penalties and interest charges related to tax liabilities in these situations have been temporarily waived or reduced. The key is to document how the business was affected and provide supporting evidence when requesting relief.

In summary, while the IRS may not readily remove all penalties and interest charges, there are strategies and relief options available for businesses facing tax issues. It’s essential to work with a tax professional who can help navigate these processes and advocate for the best possible outcome.

For more information on IRS Penalties And Interest, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (303) 720-6573 today.