Question

2. Alice’s brother, Edward, has come seeking your tax advice. He was self-employed in 2015. He did not make any estimated payments towards his 2015 income taxes. He filed for an extension on April 15, 2016, but he then never filed because he was in a car accident and spent months recovering. It is now 2017, and he is afraid to file because his return is so late.

a. If he were to file an accurate return tomorrow for 2015 that is prepared by a tax professional, what penalties can he expect the IRS to assert against him?

b. Will the IRS have to issue a Notice of Deficiency before assessing these penalties? c. Does Edward have any defenses he can raise against these penalties?    d. What options does Edward have if he wants to challenge the assessment of the    penalties by the IRS?

Answer 1

a. If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date.

So, if you are preparing a tax return for 2015 in 2017, then you will have to face the following

- The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.

- If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.

-If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.

However, You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

b. Yes, the IRS will issue Notice of Deficiency before assessing these penalities. This is because you have neither filed before the extended deadline nor the next year. Notice of Deficiency is like a remainder to file your return.

c. Actually in Edward's case he does not have strong defenses tobe raised against the penalities. But, he would defend rather ask for a waiver based on the Car accident and the time taken to recover which was unexpected and he has sufficient documents to prove the same.

d. As, said earlier he could request for a waiver based on the accident and the time taken to recover.