Friday, May 29, 2009

IRS Penalties – A Financial Nightmare

IRS penalties can be a nightmare! Most people probably do not understand just how devastating penalties imposed by the IRS can be. For individuals the IRS applies two types of penalties. One is the failure to file penalty and the other is the failure to pay penalty. The failure to file penalty is 5% of the balance due as of April 15th and continues for 4½ months. The failure to pay penalty is approximately ½ of 1% per month and is applied to any unpaid balance until the total interest charge reached 25%. The failure to pay penalty can not exceed 25%. Now let’s see how this works out.

Suppose a taxpayer did not file a tax return for 2002, 2003 and 2004. Let’s further assume that the taxpayer owed approximately $5,000 for each of those years. The IRS will apply 5% per month for approximately 4½ months to each balance. So now each balance is approximately $6,125. Next they will apply approximately ½ of 1% per month to each balance. Seeing as how the returns are fairly old the total interest rate applied will be 25%. So now each balance would be $7,375. So this taxpayer would owe $22,125 instead of $15,000 that was originally owed. This taxpayer needs help and needs help quickly! This does not take into consideration the fact that interest is continuing to accumulate. A tax professional can offer good advice on how to handle this.


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