Every once and awhile, we make a mistake and must make it right. When it comes to the IRS, saying sorry is not sufficient. The IRS can impose almost 150 types of penalties – most common are caused by late filing and late payment.
There are however ways to abate the penalties assessed against you. The first, which should be used carefully and as a last resort because you only get one, is to ask for the penalties to be forgiven under the first-time penalty abatement request. If you have penalties for multiple years, this will only work for one of them. Please discuss how and when to use this abatement request with your CPA.
Perhaps the best penalty abatement is for reasonable cause. You have to qualify to be able to use it but the IRS can waive penalties it assessed against you or your business if there was “reasonable cause” for your actions. If the IRS accepts the abatement, it will only remove the penalties. It will not impact any interest or tax you may owe.
The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:
Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.
Here are three instances where you might qualify for reasonable cause relief:
Here are five instances where you likely do not qualify for reasonable cause penalty relief:
If one of the three reasons above apply (and not primarily the five above), you may request that the IRS abate your penalties for reasonable cause. You must provide the reason (one or more of the three) and provide evidence. Your CPA can help you draft the language in your request to the IRS.
Getting your penalties abated can save you hundreds or thousands of dollars.
I was recently asked by a client if their children needed to file a tax return. As with most answers to tax questions, the answer was “It depends.” (P.S. The answers are most likely the same if you are asking if you need to file an income tax return.)
What does it depend upon?
It depends upon the amount of income amount and type of income.
Earned Income – If your child has earned income (worked a job, received a W-2), they do not need to file a tax return unless that income is greater than the standard deduction (For 2020 it is $12,400). If more than the standard deduction, they need to file.
Self-Employment Income – If you child runs their own business and has a profit of more than $400, they need to file a tax return and may owe self-employment taxes but not income taxes if total income is less than the standard deduction.
Unearned Income – If your dependent child has unearned income such as interest and dividends or passive income, they must file a return if the unearned income exceeds $1,100 or the parents may elect to report this income on their personal return and note “election to modify tax on unearned income of ___ child”. If the parent elects this treatment, the child may not need to file a return if the Earned or Self-Employment Rules above don’t apply. Unearned income over this amount may be subject to “kiddie tax” rates of either the parent’s income tax rate or that of a trust or estate.
The need to file a return is independent of whether or not a parent can claim the child as a dependent.
There are also times your child may want to file a tax return even though they are not required to do so. If they had federal or state income tax withheld on their W-2 or paid estimated taxes, they will need to file to claim the refund. There are also times that a non-dependent child may want to file in order to claim certain tax credits such as the earned income credit or the recovery rebate credit (stimulus checks not received.)
As business owners and individuals, we go about our days doing the things we do, noticing everything that is fit into our little jar of life. We own what is in our jar.
I recently had the opportunity to take a hot air balloon ride in the early morning to catch the sunrise. There, in a little basket, I began to rise and soon I began to see things I couldn’t see from the ground. My view increased and I experienced a sunrise, something I have seen before, differently. I was able to see the expanse of the river, the green of the fields, the vastness of the desert and mountains. I saw what others could not see without going up.
As a CPA, I help people all the time and I enjoy doing it. One of the things I enjoy most is to help people read what is on the label of their “jar” and help them understand what it means as well as what is outside of the jar. We can’t read the labels when we are in our jars. Some business owners have figured out how to get out of their jars and look at the labels themselves. Most need someone’s help. I love providing that help. It is wonderful to provide clarity and help them see the view from up here.
This blog allows you to experience the raw, gut wrenching drama of human conflict through accounting in each of its three stages: preparing to do battle, the thrill of victory and the agony of defeat.