The IRS is gearing up to outsource some taxpayer collection accounts to private collection agencies. Legislation passed in 2015 directed the IRS to resume working with private collection agencies. The revived program is expected to operate in a similar manner to past ones, with emphasis on taxpayer protections. (more…)
Archive for the ‘Tax Penalty’ Category
The IRS has issued its annual Data Book for fiscal year (FY) 2015, which provides statistical information on activities such as examinations and collections conducted by the IRS from October 1, 2014 to September 30, 2015. For FY 2015, the Data Book shows the total number of audits conducted by the IRS was 1.37 million, down from the 1.38 million examined in FY 2014. (more…)
President Obama signed in February the Trade Facilitation and Trade Enforcement Act of 2015 (H.R. 644). The comprehensive trade and customs bill includes an increase in the penalty for failure to file a return. (more…)
The overall individual audit coverage rate continued its steady decline in recent years, the IRS reported. The audit coverage rate for total individual returns for fiscal year (FY) 2015 was 0.84 percent, compared to 0.86 percent in FY 2014 and 0.96 percent in FY 2013. In contrast, the audit coverage rate for all types of businesses increased slightly, from 0.57 percent in FY 2014 to 0.60 percent in FY 2015. The Service also reported in February that examination revenue fell as did the number of employees engaged in collection and enforcement work.
While the audit coverage rate for all individuals fell in FY 2015, the audit coverage rate for returns reflecting income of $1 million and higher increased from 7.50 percent in FY 2014 to 9.55 percent in FY 2015. In comparison, the audit coverage rate for returns showing incomes of $200,000 and higher fell from 2.71 percent in FY 2014 to 2.61 percent in FY 2015. The audit coverage rate for returns reflecting incomes of less than $200,000 dropped the least, from 0.78 percent in FY 2014 to 0.76 percent in FY 2015. As in past years, the number of correspondence exams far exceeded field exam, although the number of correspondence exams fell below one million for the second consecutive year.
S corporations and partnerships saw increased audit coverage rates in FY 2015. The audit coverage rate for S corporation returns rose from 0.36 percent in FY 2014 to 0.40 percent in FY 2015. The audit coverage rate for partnership returns showed stronger growth, from 0.43 percent in FY 2014 to 0.51 percent in FY 2015. However, the audit coverage rate for small corporation returns (assets under $10 million) fell from 0.95 percent in FY 2014 to 0.92 percent in FY 2015. Large corporation returns also experienced a drop in audit coverage, from 12.23 percent in FY 2014 to 11.15 percent in FY 2015.
President Obama signed in February the Trade Facilitation and Trade Enforcement Act of 2015 (H.R. 644). The comprehensive trade and customs bill includes an increase in the penalty for failure to file a return.
The failure to file penalty is five percent of the unpaid tax shown on the return for one month, with an additional five percent for each month or part of a month that the failure continues, up to 25 percent. For taxpayers who fail to file their returns more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. The Achieving a Better Life Experience Act of 2014 (ABLE Act) provided for inflation adjustments for certain penalties, including the fail to file penalty, applicable to returns required to be filed after December 31, 2014.
The IRS may abate the penalty for reasonable cause. Generally, this means that if a taxpayer exercised ordinary business care and prudence and was nevertheless unable to file a return, the resulting delay may have been due to reasonable cause. However, every taxpayer’s situation is unique. Some examples of reasonable cause include, but are not limited to, the death or serious illness of the taxpayer or a member of the taxpayer’s immediate family; failure to file resulting from a fire, casualty, natural disaster, or other disturbance; or reliance on erroneous advice from the IRS.
The Trade Act provides that if a return is filed more than 60 days after its due date, then the failure to file penalty may not be less than the lesser of $205 or 100 percent of the amount required to be shown as tax on the return. The increase under the Trade Act is effective for returns required to be filed in calendar years after 2015.
The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18th in 2016 because of the intersection of a weekend and a District of Columbia holiday).
One alternative is to enter into an installment payment agreement with the IRS, where taxpayers agree in writing to make monthly payments to the IRS and to reduce their tax liability to zero over a reasonable period of time. The IRS may also agree to an installment payment arrangement for back taxes. Penalties and interest may continue to accrue, although the IRS may reduce the penalties. While the IRS is authorized to enter into a partial payment installment agreement for a portion of the taxpayer’s liability, the agency has been reluctant to do this.
Taxpayers who cannot pay the tax liability reported on their current income tax return should submit Form 9465, Installment Agreement Request, to the IRS, to request a monthly installment plan. A taxpayer who owes more than $50,000 should provide Form 433-F, Collection Information Statement, along with the request. Taxpayers can enter into different types of agreements, including:
- A traditional agreement, where they agree to make their monthly payment by check, money order, or credit card;
- A direct debit installment agreement, to make automatic payments from a bank account; or
- A payroll deduction agreement, with payments made by the employer from a paycheck.
The IRS charges a user fee for entering into an agreement: $120 for a traditional agreement; or $52 for a direct debit agreement. Qualifying low-income taxpayers pay a fee of $43, regardless of the type of agreement. If the agreement is restructured (because of a change in the taxpayer’s financial condition, for example), or if the IRS terminates the agreement and then agrees to reinstate it, the IRS will charge a fee of $50.
Yes, the IRS can impose penalties if a tax return is not timely filed or if a tax liability is not timely paid. As with all IRS penalties, the rules are complex. However, a taxpayer may avoid a penalty if he or she shows reasonable cause. (more…)