Does the IRS have Feelings?

The IRS may not have emotions, but the agency is certainly feeling empathy for those taxpayers who have come upon rough financial times.  As part of its “Fresh Start” initiative the IRS is granting penalty relief to those who found themselves unemployed this past year or saw their business income decrease significantly.  IRS Commissioner Doug Shulman announced, “We have an obligation to work with taxpayers who are struggling to make ends meet.  This new approach makes sense for taxpayers and for the nation’s tax system, and it’s part of a wider effort we have underway to help struggling taxpayers.”

The penalty relief part of the Fresh Start initiative comes this year in a waiver of the failure-to-pay penalty for eligible individuals.  The failure-to-pay penalty is assessed by the IRS when an individual does not pay their taxes on time.  On 2011 individual income tax returns the penalty is one-half of 1% per month starting on April 17, 2012 and continuing until the taxes are paid in full.  Individuals who enter into an installment agreement with the IRS and have their payments directly debited from their bank account can reduce the penalty rate to one-quarter of 1%.  However, you must act quickly to get the reduced penalty rate.  If the IRS issues a Notice of Intent to Levy for the taxes, the rate accelerates to 1% per month and cannot be reduced.  Regardless of the penalty rate, the maximum failure-to-pay penalty is 25% of the taxes not paid.

Eligible taxpayers under this part of the Fresh Start initiative include wage earners and self-employed individuals.  For wage earners to qualify they must have been unemployed at least 30 consecutive days during the period January 1, 2011 to April 17, 2012.  For the self-employed to qualify they must have experienced at least a 25% reduction in their business income from 2010 to 2011.

Penalty relief will only be granted to individuals who have income less than $100,000 ($200,000 for joint filers).  The relief is also limited to taxpayers who have a balance due of $50,000 or less on their 2011 tax returns.

The penalty relief is not indefinite.  The IRS will not charge the penalty from April 17, 2012 through October 15, 2012.  While the penalty is not being charged, interest will continue to be charged.  The current interest rate on late-paid taxes is 3% per year.  The IRS does not have the authority to waive the interest charges.

Applying for penalty relief requires the completion of a new Form 1127-A.  The form is aptly titled, “Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship.”

If you would like more information about the Fresh Start initiative or dealing with taxes that you are unable to pay – contact the tax professionals at Seid & Company, CPAs.