PENALTY ABATEMENT
Do I Have Reasonable Cause?

The penalty for late filing of federal payroll tax returns is 4.5% per month for the first 5 months. There is also a .5% per month federal penalty for failure to pay the tax which usually begins to accrue as of the due-date of the return. While the failure to file penalty reaches its maximum after the fifth month (22.5% total), the failure to pay penalty continues to accumulate to a maximum of 25%. Therefore, the total federal filing and late payment penalties can reach a whopping maximum of 47.5%!

State penalties follow a different schedule, but accumulate after 60 days to the 20% level. Additional state and federal penalties may be charged for failure to make tax deposits. Both the IRS and the state charge interest on the penalties as well as the base tax, currently at the rate of 7% compounded daily.

It is therefore not uncommon in payroll tax delinquency cases for penalties and interest to reach a level equivalent to a 40% addition to the base tax due. This makes for an extremely expensive loan from the government, and reason to apply for abatement if the underlying circumstances merit.

Penalty Abatement — Reasonable Cause Federal law provides for the reduction or removal of penalties if there is an acceptable reason or “reasonable cause.” Some of the more obvious justifiable reasons for not filing/paying may be physical or psychiatric illness of a principal in the company, death of a principal, or the need for the principal to care for a family member with an illness. Under certain circumstances, the unavailability of documents or records may provide reasonable cause to remove or reduce penalties. If the dollar amount of the penalty is large and there are compelling circumstances to support “reasonable cause,” hire a professional to pursue penalty abatement.

Other Penalty Abatements Additionally, and as a practical consideration, penalties may be abated in certain cases at the revenue officer level.