As in sport, the tax world could be a recreation of customs

A better Game 7 in the semifinals of the Eastern Conference of the NBA Championship could not have been written. With a spot in the conference finals on the line, the Milwaukee Bucks had risen 109-107. Brooklyn Nets' Kevin Durant got the ball and pulled a spinning jumper up near the three-point line. One of the best shooters in the league – with a remarkable 40.2% of three-point shots during the playoffs – it was no surprise Durant's shot hit the net. What was surprising was that Durant's foot was on the line, which apparently turned three points into two points. The resulting overtime didn't work in favor of the Nets and the team's championship dreams came to an end.

Kevin Durant # 7 of the Brooklyn Nets reacts during the seventh game of the second round of the Eastern Conference at the Barclays Center on June 19, 2021 in the Brooklyn neighborhood of New York City.

Photo by Elsa via Getty Images.

I've watched the replay over and over and can't help but think of Al Pacino's character in Any Given Sunday when comparing life to sport. "You find out that life is a game of inches … the margin of error is so low – I mean, half a step too late or too early and you won't quite make it," he says. "The centimeters we need are all around us."

This also applies to taxes. A mistake in the tax world – even if it appears minor or is not intended – often results in a heavy penalty. And like with exercise, what you do next can make all the difference.

Tax penalties

The IRS can impose a penalty if you fail to pay a tax due on time or fail to file your tax return on time. You can also be fined if you fail to properly report your income and deductions, or otherwise fail to provide accurate information on your tax return.

The two penalties that most taxpayers are familiar with are the penalty for non-payment and the penalty for non-filing.

If you fail to file your tax return in a timely manner, Section 6651 (a) (1) may impose a penalty of 5% of the tax owed for each month that your tax return is late, up to a maximum of 25%. . If your return is delayed more than 60 days, there is also a minimum late filing penalty. For 2021, it's the lower of $ 435, or 100% of the tax owed.

If you file your tax return but do not pay all of the tax due, you may be charged a penalty of 0.5% for each month up to a maximum of 25% of the tax under Section 6651 (a) (2). The penalty rate increases to 1% if the tax is left unpaid 10 days after the IRS publishes a letter of intent to collect property.

And this is where it matters whether your mistakes are inches or feet: small mistakes or those that are quickly fixed usually result in lesser penalties. In contrast, willful behavior and fraud can significantly increase the penalty. This applies to most forms, from 1040s to FBARs.

IRS notices

If you are fined, the IRS will mail you a notification. The notice will tell you the type and amount of the penalty and what action to take. Typically, to fix these errors, you need to file a missing or late tax return, pay a pending tax invoice, or explain a mistake such as a tax return. B. a forgotten social security number. Sometimes, if you can solve the problem easily, there is no penalty.

Interest and Penalties

If you don't fix the error, the amount due can skyrocket: the IRS charges interest on penalties. When the interest starts running depends on the type of penalty and usually continues until you have paid the full amount due.

If you pay off part – but not all – of your debt, the amount due will be reduced, but in a specific order. The IRS applies payments to tax first, then penalty, and finally interest.

Fix your mistake

If the mistake was not your fault or you disagree with the amount owed, you can claim the penalty. But be careful: If the notice of the fine contains instructions or deadlines for reducing the penalty, you must first follow these steps. Otherwise, there are several ways you can challenge a penalty:

  • Call the IRS at the number in the top right corner of your notice. This is a great option to face minor penalties or mistakes that you can easily correct.
  • File form 843. In general, you'll need to file a separate Form 843 for each tax period or type (exceptions apply).
  • Write to the IRS. Many tax professionals – like me – prefer to write a letter because it gives you the opportunity to explain in detail why the fine should be abolished. You should include the notification you received along with any documents supporting your reasoning. Be sure to state the amount owed, the amount paid so far, as well as the penalties and interest due now.

Kinds of relief

There are typically three types of penalty relief taxpayers seek: First Time Reduction, Reasonable Reason, and Flawed Written Advice from the IRS.

You can qualify for first pardon if you did not have to file a tax return or no penalties were imposed in the three tax years prior to the tax year associated with the sanction; You have submitted all the necessary declarations; and you have paid or arranged to have any taxes due. This is in line with the "I was always a good taxpayer" argument and you are asking the IRS to overlook a mistake that was untypical of you. The IRS considers first-time mitigation before other reliefs.

If you are not eligible for an initial discount, you may still be eligible for relief due to reasonable reason. Reasonable reason is a concept of art. The IRS expects you to demonstrate that you have used normal business care and caution in the performance of your tax obligations but have been unable to do so due to circumstances beyond your control. This could include a fire or natural disaster, serious illness, or the inevitable absence of you or an immediate family member, or the inability to obtain timely records.

You should explain in detail what prevented you from filing your tax return or paying your taxes. Additionally, the IRS would like to know what steps you took to file and pay your taxes after the issue was resolved. For example, if you were unable to file your tax return because you were in hospital, the IRS would like to know when you were discharged and how quickly you filed the tax return after that time. Here, too, the supporting documentation will be decisive.

The IRS manual contains a chapter on penalties. The section on justified reasons can be found under There is also a list of questions for the IRS to consider when granting reasons: Make sure you address these in your letter.

The IRS will also remove your sentence if the IRS has given you concrete written advice that led to an error. It must have been provided by you in response to a complete and accurate consultation request. When you ask for discharge, be prepared to include your first application and response along with your response.


If the IRS does not provide relief, you may be able to appeal the outcome. Pay attention to deadlines and other details in your letter of rejection.

Life lesson

Don't let one mistake throw you off balance forever. Paying attention to the consequences – and knowing the limits – can help prevent you from making mistakes in the future. And like Kevin Durant, you get another chance to get it right next year.

This is a weekly column by Kelly Phillips heir, the tax girl. Erb provides commentary on the latest tax law, tax law, and tax policy news. Every week, find Erb's Bloomberg Tax column and follow her on Twitter at @taxgirl.

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