Taxes are due every year on April 15th, and if you fail to meet the deadline, you could face interest and penalties of up to 25%. Both the U.S. Internal Revenue Service and the Maryland Comptroller use the threat of interest and penalties to ensure that taxpayers meet deadlines. But each year, up to seven million taxpayers nationwide miss the deadline. If a taxpayer has a reasonable explanation for missing a deadline, the IRS and the Maryland tax authority can waive the penalty.
Federal Tax Penalty Abatement
The IRS's First Time Abatement Policy allows it to waive penalties if:
- You didn't need to file a return in the past, or you have no penalties in the last three years;
- You filed all currently required returns or requested an extension of time to file;
- You paid or arranged to pay any taxes due.
The most commonly requested reason for penalty abatement is reasonable cause. The IRS is more likely to grant a penalty abatement request if it matches a specific section of the IRS Manual. These include:
- Fire, casualty, natural disaster or other disturbances
- Inability to obtain records
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer's immediate family
- Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations
You will need to demonstrate to the IRS that you “used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.” The IRS does not consider being broke to be “reasonable cause,” but the reason behind a taxpayer's financial difficulties may count as “reasonable cause.”
Because the IRS will continue to apply interest as part of a failure-to-pay penalty until you pay your taxes in full, it may be a good idea to wait to request a penalty abatement until you've entirely paid your taxes.
Maryland Tax Penalty Abatement
Similar rules apply when requesting a Maryland tax penalty abatement, and you must be current on your tax filings. It's a good idea to file your Maryland taxes on time whenever possible. Maryland’s interest rate for delinquent taxes is 11% for 2019 and 10.5% for 2020. In 2018, the interest rate was 13%—one of the highest in the nation. If you fail to pay, you'll receive an assessment notice with interest and penalties. Maryland law presumes that the Maryland tax authority's assessment notice is correct, and you will have 30 days to appeal and request a hearing. But the Maryland tax authority, tax collector, or the courts may abate interest and penalties applied to your tax bill if you have a reasonable explanation for failing to pay.
If you would like to request a federal or Maryland state tax penalty abatement, our tax law professionals can help. Gabaie & Associates, LLC, represents clients in tax matters nationwide before the IRS and state tax agencies. Call us at 443-345-8291 or contact us online for a free consultation.