The Internal Revenue Code at section 6651(a)(2) penalizes a taxpayer who does not timely pay the tax shown on their return. While this provision applies to a variety of tax returns, it certainly includes the income tax return. There is an exception to this penalty - where the failure to pay is due to reasonable cause, and not willful neglect. In that instance, the IRS will abate the penalty.
From a practical perspective, this penalty is assessed against taxpayers as a matter of course at the time of filing a return with a balance due that is paid late. The IRS simply sends the taxpayer a notice with the penalty assessment. The penalty is calculated at a rate of 0.5% of the late payment for each part of a month that the payment is late. The penalty maxes out in 50 months at 25% of the late payment. It is important to note that extending the filing date of a tax return does not extend the time to pay the balance due. As such, this penalty will apply during the extension time frame unless the late payment is actually paid with the filing of the extension.
As many are aware, Congress was rather last minute in its efforts to avoid automatic tax increases and expirations of a variety of tax clauses at the end of 2012. Ultimately, Congress enacted a new law on January 2, 2013. The new law is known as the American Taxpayer Relief Act of 2012 (ATRA). This new law, like most tax laws, required the IRS to revise many tax forms and test those revisions in its system.
As might be imagined, adjustments to the comprehensive programming at the IRS because of changes in the law take some time and the implementation of the ATRA law was no different. In spite of its best efforts, and because of the delay by Congress, the IRS was well into filing season before it finalized many tax forms, therefore causing delay to some taxpayers.
In an acknowledgment of the above, the IRS issued a notice on March 20, 2013, at http://www.irs.gov/pub/irs-drop/n-13-24.pdf. In this notice, the IRS basically created a scenario where a taxpayer could show automatic reasonable cause for an abatement of the failure to timely pay penalties of section 6651(a)(2). If the taxpayer included any of the forms that are referenced in the Notice, which are all forms that were delayed by the new law, then the taxpayer responds to the notice calculating the penalty by sending the IRS an explanation that identifies the form that was included in the return which was part of the delayed processing and that the taxpayer qualifies for the abatement because of the special IRS Notice - which is known as Notice 2013-24.
To qualify for relief under the Notice, taxpayers must still pay their estimated tax balance by the due date of the return. Any estimated balance due that isn’t already paid is typically paid with the filing of the extension. And, taxpayers must pay the remaining balance by the filing of the properly extended tax return. There are 31 tax forms that could cause a taxpayer’s penalty to qualify for abatement under this Notice. The Notice includes forms relating to Residential Energy Credits, the Work Opportunity Credit, Mortgage Interest Credit, Passive Activity Loss Limitations, Qualified Adoption Expenses, American Opportunity and Lifetime Learning Credits, Energy Efficient Home and Appliance Credits, and the Alternative Motor Vehicle Credit, among others.
Ideally, the IRS would simply program their systems to automatically abate any taxpayer’s penalty that meets the parameters above, relieving the taxpayer of the burden of follow up to abate the penalty. Presumably, the procedure of Notice 2013-24 is a more feasible resolution to this problem. Should you have any questions regarding this matter, don’t hesitate to contact our office.