Tax Planning Strategy: Penalty Avoidance

About this page:

If you want to stop paying high taxes for you, your family, or your business, learning how to avoid penalties as a tax planning strategy, is a great way to get started!

"For all taxpayers, we want you to know more

about penalties, how to avoid them in the future,

and the penalty abatement options available

if penalties you've already been assessed.

A little bit of knowledge and support can help

you save hundreds in penalties each year."

~ JLW, owner/manager, Lentax.co

Read on to learn about penalties, how to avoid them, and how to have them removed.

Tax Planning & Penalty Avoidance

Tax planning is a way to plan for any life or business changes that may affect your taxes and by using tax strategies saves you money by making tax law work for you. Tax planning includes using tax exclusions, deductions, deferrals, tax rates, and credits in the right formula to keep more earnings in your pocket.

Avoiding penalties (PYP, for short¹) is a strategy individuals or businesses can use for this purpose.

Avoiding PYP can used to keep money in your pocket!

It is a strategy that anyone can master.

¹ Our acronym PYP stands for penalties you must pay. Avoiding penalties, you are required to pay if you do not comply with the rules, can save you hundreds in additional taxes.

The regulations related to penalties are as follows: 1) 26 U.S. Code § 6071 - Time for filing returns and other documents, 2) 26 U.S. Code § 6072 - Time for filing income tax returns, https://www.law.cornell.edu/uscode/text/26/6072#:~:text=26 U.S. Code § 6072 - Time for filing income tax returns, 3) 26 U.S. Code § 6501 - Limitations on assessment and collection, https://www.law.cornell.edu/uscode/text/26/6501#:~:text=26 U.S. Code § 6501 - Limitations on assessment and collection, 4) 26 U.S. Code § 6502 - Collection after assessment, https://www.law.cornell.edu/uscode/text/26/6502#:~:text=26 U.S. Code § 6502 - Collection after assessment, 5) 26 U.S. Code § 6654 - Failure by individual to pay estimated income tax, https://www.law.cornell.edu/uscode/text/26/6654#:~:text=26 U.S. Code § 6654 - Failure by individual to pay estimated income tax, 6) 26 U.S. Code § 6655 - Failure by corporation to pay estimated income tax, https://www.law.cornell.edu/uscode/text/26/6655#:~:text=26 U.S. Code § 6655 - Failure by corporation to pay estimated income tax, 7) 26 U.S. Code § 6662 - Imposition of accuracy-related penalty on underpayments, https://www.law.cornell.edu/uscode/text/26/6662#:~:text=26 U.S. Code § 6662 - Imposition of accuracy-related penalty on underpayments, and 8) 26 U.S. Code § 6672 - Failure to collect and pay over tax, or attempt to evade or defeat tax, https://www.law.cornell.edu/uscode/text/26/6672#:~:text=26 U.S. Code § 6672 - Failure to collect and pay over tax, or attempt to evade or defeat tax

² For married filing joint filers, the penalties are accessed against each spouse separately. The same applies to members of S corporations and partners in a partnership, the penalties are accessed against partnership and carried forward on the individual members and partners returns.

³Posted June 10, 2022. The IRS new release IR-202 2-125 IRS wraps up 2022 "Dirty Doze n" scams list; agency urges taxpayers to wat ch out for tax a voidance strategies quoted that: "The IRS continues to focus on people who choose to ignore the law and not file a tax return, especially those individuals earning more than $100,000 a year...Those who choose not to file a return even when they have a legal filing requirement, and especially those earning more than $100,000 per year who don't file, represent a compliance problem that continues to be a top priority of the IRS". Mitigate this risk by following Step 1 - 4 indicate above.

⁴About IRS audits, if you get audited, it does not always suggest there’s a problem. The IRS uses several different audit selection methods: 1) Random selection and computer screening. This is where returns are selected based solely on a statistical formula. The IRS compares your tax return against what they call “norms” of similar returns. They develop these “norms” from audits of statistically valid random samples of returns, as part of their National Research Program. The IRS uses this program to update return selection information and, 2) Related examinations of returns may be selected when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit. Next, an experienced auditor is assigned the return for review. They may accept it, or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examination group. To learn more about IRS audits, visit https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits.

Find out how we protect you against an audit for any tax form we prepare for you, visit www.lentax.co/taxprep#Protection-Plus.

First, determine how much the penalty is and whether it applies to you.

The following penalties apply to all taxpayers:

Failure to File A Tax Return

Failure to File An Information Return

Failure to File Accurately

Failure to Deposit Employment Taxes When Due

Failure to Pay On Time

Failure to Pay Estimated Taxes (corporations)

Failure to Pay Estimated Taxes (individuals/self-employed)

Click on the links above to be directed to the IRS' website related that penalty. Return to this site for details that will be made available in the near future.

In addition to penalties, interest is charged on any tax not paid by the return due date.

For individual taxpayers, it's the federal short-term interest rate plus 3 percentage points. This means that until June 30, the rate is 4% per year, compounded daily. Starting July 1, 2022, through September 30, 2022, the rate will be 5% per year, compounded daily. Interest rates are subject to change quarterly.

Interest stops accruing as soon as the tax is paid in full. By law, interest cannot be abated, however, interest charged on a penalty will be reduced or removed when that penalty is reduced or removed. If an unpaid balance remains on your account, interest will continue to accrue until the account is full paid.

How Can I Remove or Abatement Penalties That Have Already Been Assessed?

The IRS may provide administrative relief from a penalty that would otherwise be applicable under IRM Part 20.1.1 Introduction and Penalty Relief of its F irst Time Penalty Abatement policy.

You may qualify for First Time Penalty Abatement (FBA) for relief from the following penalties:

Failure to file a tax return

Failure to pay on time⁵

Failure to deposit employment taxes when due

If you received one of the penalties above and you can answer "Yes" to all of the following, you can apply for FBA:

1. I didn’t previously have to file a return or

I did not have penalties for the 3 tax years prior to the tax year in which I received a penalty

2. I filed all currently required returns or

I filed an extension of time to file
3. I paid, or arranged to pay, any tax I owe

Determination is made on a first come first-serve basis. When we file for abatement for you⁶, we request abatement over the phone or by filing IRS Form 842 Claim for Refund and Request for Abatement⁷, if verbal approval is not granted over the phone. If FBA is not available or is denied, other relief options are available⁸.

⁵ The failure-to-pay penalty will continue to accrue, until the tax is paid in full. It may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the Service's first time penalty abatement policy.

⁶ Generally, IRS must notify us within thirty (30) days of the date of our abatement request as provided for by IRS Policy 21-3.

⁷Other types of penalty relief options are available, including Reasonable Cause and Statutory Exception.

⁸ IRS Form 842 Claim for Refund and Request for Abatement is used to claim a refund or request an abatement of certain taxes, interest, penalties, fees, and additions to tax, https://www.irs.gov/forms-pubs/about-form-843.

⁹To fully realize the tax savings in any tax plan we create, we provide implementation assistance including matching you to quality investment companies, vendors, and financers,

as well as, by filing the necessary form(s) with your timely filed tax return, including extensions, for the tax year that the tax benefit will be most effective.

Did you know? In Publication 55-B (Rev. 5-2022) Internal Revenue Service Data Book (2021), page 2 indicates that civil penalties for individuals, estate and trust income taxes make up 80% of all the amount of penalties assessed against the following taxpayers combined:

Corporations

Employment Taxes

Estate and Gift Taxes

Excise Taxes and Tax-Exempt Organizations and Trusts

Information returns filers¹⁰

Partnerships

S Corporations

Tax return preparers

The bottom line. Use PYP as a tax planning strategy so you are not spending it on avoidable tax penalties, and your earnings are kept where they belong, in your pocket.

Did you know? Under the tax law, if you pay someone for services, you are responsible for knowing they are, by collecting their legal name and taxpayer identification number, or TIN (i.e. their SSN or EIN).

Payments subject to backup withholding¹¹:
Attorney fees (Form 1099-NEC)

Attorney gross proceed payments (Form 1099-MISC)

Brokers/barter exchange payments (Form 1099-B)

Certain Government Payments (Form 1099-G)

Commissions and fee payments (Form 1099-NEC)

Dividends (Form 1099-DIV)

Fishing boat operators payments¹³ (Form 1099-MISC)

Gambling winnings (Form W-2G)

Independent contractor payments (Form 1099-NEC)

Interest payments (Form 1099-INT)

Original issue discount (Form 1099-OID)

Patronage dividends¹² (Form 1099-PATR)
Payment Card and Third Party Network Transactions (Form 1099-K)
Rents, profits, or other gains (Form 1099-MISC)
Royalty payments (Form 1099-MISC)

The bottom line. Use PYP as a tax planning strategy, which includes making backup withholding payments and filing information returns accurately and timely, so you are not spending it on avoidable tax penalties, and your earnings are kept where they belong, in your pocket⁹.

¹¹Payment excluded from backup withholding are as follows: 1) Real estate transactions 2) Foreclosures and abandonments 3) Cancelled debts 4) Distributions from Archer MSAs 5) Long term care benefits 6) Distributions from any retirement account 7) Distributions from an employee stock ownership plan 8) Fish purchases for cash 9) Unemployment compensation 10) State or local income tax refunds, and 11) Qualified tuition program earnings.

¹²Patronage dividends are subject to backup withholding if at least half the payment is in money. For more information, see the IRS Backup Withholding page, https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding.

¹³ Patronage dividends are subject to backup withholding if at least half the payment is in money. For more information, see the IRS Backup Withholding page, https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding for the part that is in money and that represents a share of the proceeds of the catch.

Tax Planning Strategy: Penalty Avoidance*

About this page:

Tax Planning & Penalty Avoidance

Avoiding PYP can used to keep money in your pocket!

It is a strategy that anyone can master.

How Can I Use PYP As A Strategy?

Step 1

Step 2

Step 3

Step 4

How Can I Use PYP As A Strategy?

Is There Interest Charged On Penalties?

How Can I Remove or Abatement Penalties That Have Already Been Assessed?

Interested in a personalized tax savings presentation?

How Much Are Taxpayers Paying In Penalties?

Interested in a personalized tax savings presentation?

Do I Need To Pay Backup Withholding?

Interested in a personalized tax savings presentation?