Timely Filing

• The best way to avoid penalty and interest assessments from the IRS is to file returns and make payments in a timely manner. Individual income tax returns are due each year on April 15, unless the date falls on a weekend or holiday. If so, the deadline is extended to the following business day. You can file for up to two extensions, which will push the filing date to August 15 and October 15 respectively. However, extensions are for filing the actual paperwork, not for paying taxes owed. You must estimate the amount of tax owed andsubmit it with the extension to avoid penalties and interest.
  
  

Appeals

• If you pay your taxes late, or if you underpay, the IRS will assess penalties and interest from the due date of the return until the date the tax is paid. If there is reasonable cause for the failure to pay on time, you can appeal to the IRS for an abatement of the late penalty. When you receive the late-filing penalty bill from the IRS, send it back with a written explanation of why you filed late. If the IRS deems the reason is other than willful neglect, it will consider abating the penalty. Typically, the IRS will not abate interest charges.
  
  

Borrowing

• Penalty and interest rates with the IRS are stiff and accumulate every day of non-payment of taxes. The interest rate is determined quarterly, is based on the federal short-term rate plus 3 percent and is compounded daily. Penalties are calculated as a percentage of the tax owed. If you do not have the funds available to pay your tax obligation, it may be wiser to borrow the money from a lending institution than to pay taxes late. The interest rates charged by the lending institution may be lower than the interest and penalties that will be assessed by the IRS.
  
  

Tips

• There are special circumstances in which the IRS will not assess penalties and interest for late filing. Examples are taxpayers serving in a combat zone with the armed forces or victims of natural disasters.
  
  If you receive a notice of penalties or interest due from the IRS that you believe are in error, you can appeal the judgment. Compose a letter explaining why you feel the assessment is in error. Attach copies of all supporting documentation. Be sure to mail the explanation prior to the response date referred to in the letter.
  
  If you are unable to come to resolution with the IRS, consider consulting with a tax attorney.