Continuing on last week’s topic on tips for dealing with an IRS audit and avoiding penalties, it is important to be up front about any errors you may have made. For example, if you entered $10,000 instead of $1,000 for a line item, just own up to it as it will save time as well as demonstrate your integrity. Another tip is to locate the original receipts for any assets in which you are showing any depreciation for, even if the purchase of an asset goes back more than three years. The IRS can request purchase documentation for any asset on your schedule for depreciation.
If you are unable to locate important documents to support your figures, reconstruct the data or get affidavits in writing from individuals who can objectively verify your data.
If a tax return with a balance due the IRS is filed late, two kinds of penalties can be assessed; a penalty for filing late and a penalty for late payment. The penalty for filing late is 5 percent of the balance owed each month. The penalty for late payment is half a percent per month up to 25 percent. There is also a minimum penalty of $135 or 100 percent of the unpaid tax if it is less than $135. On top of the penalties is the monthly interest charged on both the amount of tax owed and the penalties assessed.
So if you can reduce the amount of the penalties, you will also reduce the amount of interest. It is next to impossible to get the late-payment penalty waived. The late filing fee can reach its maximum of 25 percent in five months, but this can be challenged. Acceptable explanations for being late include death of the taxpayer, such as a spouse or a medical condition resulting in incapacitation can also be a valid excuse.
Mental illness or substance abuse may be considered for incapacitation as long as there is written evidence from a therapist, substance abuse counselor or physician. Even police reports or other third party affidavits from those who may have been affected by the illness or abuse may also be considered. In the case of the death of a spouse who handled all of the tax issues in the relationship you may have to demonstrate your inability to know how to handle the situation. Shock, grief or depression may be considered viable explanations for waiving penalties.
Of course, it may be worthwhile to consult with a tax attorney adept at all the intricacies of the IRS’s requirements for waiving penalties for late payments as well as dealing with an IRS audit. If you have been informed an audit is forthcoming, do not delay in responding to it, contact the number listed in the notice or have your tax professional handle the communication and details surrounding the audit.
Source: The Wall Street Journal, “Surviving the dreaded IRS audit,” Eva Rosenberg, Jan. 11, 2013
Our Bay Area law firm helps families and individuals with a range of tax issues, including IRS audits, tax litigation and business and professional deductions and asset depreciation.