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emc011075
emc011075, Tax adviser
Category: Tax
Satisfied Customers: 2456
Experience:  IRS licensed Enrolled Agent and tax instructor
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I am aware there is a penalty to file, failure to pay and

Customer Question

I am aware there is a penalty for failure to file, failure to pay and failure to deposit taxes for 941's. Is there a combined maximum penalty that the IRS can charge?
Submitted: 6 months ago.
Category: Tax
Expert:  emc011075 replied 6 months ago.

Hi. My name is ***** ***** I will be happy to help you.

There's maxim failure to file and failure to pay, each up to 25%. There's no limit on failure to make timely deposits and interest. You may request abatement of penalties (but not the interest) if you have a reasonable cause. Here are some common examples:

1. Death or serious illness of a taxpayer or death or serious illness in his/her immediate family;

2. Unavoidable absence of taxpayer;

3. Destruction by fire, other casualty or civil disturbance of a taxpayer’s residence, place of business or business records;

4. Inability to obtain records;

5. The taxpayer mailed his/her return or payment in time to reach the Internal Revenue Service office within the prescribed time period with the normal handling of the mail. Through no fault of the taxpayer, the return was not delivered within the prescribed time period.

6. Reliance on erroneous information (written or oral) from an employee of the Internal Revenue Service. The IRS’s failure to provide the taxpayer with requested information/forms necessary for filing/paying.

7. Reliance on erroneous advice from a competent tax advisor.

But if the IRS determine that your actions were willful, that you will be also looking at trust fund recovery penalty. But it is not very common.

Expert:  emc011075 replied 6 months ago.

Any questions?

Expert:  emc011075 replied 6 months ago.

And if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. You find the rating bar on the top of the page – 5 stars. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.

Customer: replied 6 months ago.
If I am reading Chapter 23 correctly of the Internal Revenue Manual, it states, in 4.23.9.10 item 5, in cases subject ot failure to file and failure to pay penalties special provisions apply. No taxpayer will be subject to more than 5% per month, limited to a maximum of 25%. However, in addition, there would be the penalty for failure to make timely deposits of 15%. That would mean the max penalty would be 40%. Am I reading this correctly?
Expert:  emc011075 replied 6 months ago.

Failure to file and failure to pay are two separate penalties. If you are subject to both at the same time, the combined penalty is no more than 5% per month (4.5% for not filing and 0.5% for not paying). But once the failure to file penalty reaches 25%, the failure to pay continues at the higher rate. The combined penalty for failure to file and failure to pay can be as high as 47.5% (25% failure to file and 22.7% failure to pay).

And this is in addition to 15% penalty for failing to make timely deposits. And there's no limit on interest that is about 3% per year compounded daily, which means about 0.8% is adding to your balance every day as interest.

Customer: replied 6 months ago.
I understand they are two seperate penalties. What about the special provisions specified in in 4.23.9.10 item 5 that states the combined penalties for failure to file and failure to pay are limited to a maximum of 25%?
Expert:  emc011075 replied 6 months ago.

Failure to file is 5%, failure to pay is 0.5%. If you have both at the same time, the failure to file is reduced by 0.5% so your combined penalty is not more than 5%. That's the special provision.

Once the failure to file reaches 25%, the failure to pay penalty continues until you pay the balance or it reach the maximum for 22.7%

Expert:  emc011075 replied 6 months ago.

Here's IRS break down of the penalties and interest. Note, that both penalties are calculated separately and can be up to 25% of the unpaid balance: https://www.irs.gov/taxtopics/tc653.html

Customer: replied 6 months ago.
I understand what you are saying. What about the language that states limited to a maximum of 25% in 4.23.9.10 item 5? Are you saying that is incorrect.
Expert:  emc011075 replied 6 months ago.

Do you have a link?

Expert:  emc011075 replied 6 months ago.

I see. No, it is not incorrect. You have to read the entire paragraph. Read item 4.

Customer: replied 6 months ago.
What is a link?
Expert:  emc011075 replied 6 months ago.

4. The penalty imposed by IRC 6651(a)(2) is one-half of 1% for each month or fraction thereof during which the failure to pay continues, limited to a maximum of 25% of the tax shown on the return (or required to be shown and which is not shown after notice and demand) reduced by:

  1. Any part of the tax which is paid on or before the beginning of such month and

  2. Any credit against the tax which may be claimed on the return.

5. In cases subject to the failure to file and failure to pay penalties special provisions apply. No taxpayer will be subject to more than a 5% penalty (both penalties combined) in any one month, limited to a maximum 25%. In these cases the delinquency penalty will be computed at 41/2% per month and the failure to pay penalty at one-half of 1% per month.

It may not be very clear, but the section talks about the failure to pay penalty. The section above talks about failure to file penalty.

Customer: replied 6 months ago.
I did read item 4. However item 5 states that the combined failure to file and failure to pay is limited to 25%.
Expert:  emc011075 replied 6 months ago.

The combined limit applies to the monthly maximum, not tho the maximum penalty.

Expert:  emc011075 replied 6 months ago.

Here's another legal source: May be easier to read than the IRS manual:

http://www.nolo.com/legal-encyclopedia/irs-penalties-affect-small-business-32279.html

Expert:  emc011075 replied 6 months ago.

Per Nolo: (link in the previous post)

Filing and Paying Late

A special rule applies if your business both files its taxes late and underpays. The IRS can (and probably will) impose a "combined penalty" of 25% of the amount owed if you don't pay in the first five months after the return and tax are due. After five months, the "failure to pay" penalty continues at 0.5 % per month until the two penalties reach a combined maximum of 47.5 %. This is a slightly (2.5 % less overall) penalty than if the two penalties were applied separately. Those IRS folks sure can be generous.

IRS penalties are "stackable." Late filing and paying penalties can be imposed by the IRS on top of other penalties -- like those imposed for fraud and filing an inaccurate return.

Per Legal zoom: https://www.legalzoom.com/articles/what-are-the-penalties-for-not-filing-taxes

Not Filing and Not Paying Are Not the Same

This belief is a very serious mistake, because the IRS penalizes for both not filing and not paying. So, what can you do if you calculate your return only to realize you don't have the money to pay the tax? Many people in this situation believe they shouldn't file if they don't have the money. Again, it would be a big mistake not to pay. But, why?

Well, you end up paying a penalty on the amount you owe at 5% per month (4.5 % for not filing and 0.5% for not paying). The total penalty for failure to file and pay can eventually add up to 47.5% (22.5% late filing, 25% late payment) of the tax owed. Interest, compounded daily, is also charged on any unpaid tax from the due date of the return until the date of payment.

Expert:  emc011075 replied 6 months ago.

The IRS publications are sometimes not easy to understand and outright confusing. And finally per IRS website:

  • If after five months you still have not paid, the failure to file penalty will max out, but the 0.5% failure to pay penalty continues until the tax is paid, up to 25%.

https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/irs-procedures/collection-procedural-questions/collection-procedural-questions-3

Expert:  emc011075 replied 6 months ago.

and the next point:

  • The total penalty for failure to file and pay can be 47.5% (22.5% late filing and 25% late payment) of the tax owed.
Expert:  emc011075 replied 6 months ago.

I need to leave now but will be back in about an hour if you have any additional questions.

Expert:  emc011075 replied 6 months ago.

Any question? Is there anything else I can help you with today?

Customer: replied 6 months ago.
I believe I understand what you are saying. In addition would the failure to deposit penalty still apply in the amount of 15%?
Expert:  emc011075 replied 6 months ago.

Yes, it will. The failure to deposit is again a separate penalty. You can file a return but not pay or deposit the amount. You can pay and make the deposit but not file a return. Each penalty is for something else and computed separately. The interest is calculated from the final balance due - tax + penalties.

Expert:  emc011075 replied 6 months ago.

I see you offline now. So if you found my answers helpful, a Positive Rating would be greatly appreciated. You find the rating bar on the top of the page – 5 stars.

However, if you need clarification, or want to discuss this issue further, let me know. I am on the NY time (EST zone). Thank you.

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