How ironclad is the IRS penalty system? If TurboTax calculates a penalty on your 1040, you should pay it, right? Not so fast…

While you may think that the IRS will reign fire, brimstone, and a wealth of paperwork, including additional penalties and interest if you don’t pay the penalty you’ve calculated for late payment or late filing, we have found some real wiggle room on this issue. One consideration is amount, one is health, the final is behavior.

Let’s start with the amount. For over 25 years, we have deleted the IRS penalty in our tax software if it is under $100. As of today (knock on wood) we have not had one client report receiving a followup penalty notice from the IRS.

I can also report success in knocking out some state penalties.Believe it or not, however, states are far more aggressive than the IRS. As to whether the return is CPA-prepared and thus glides through without additional scrutiny, I have no idea, I would expect the same results from TurboTax.

What about health? If the taxpayer had dementia and was not able to handle his/her own affairs around the time the return was due, the taxpayer should qualify for abatement.

Now for the good behavior. You could qualify for the IRS’s first-time penalty abatement program and not even know it. Under this program, if you have

• paid or otherwise arranged to pay your overdue taxes and
• have been tax-compliant for the last 3 years,

the IRS will OK a one-time waiver of your late payment plus your late filing penalties. There is one catch, though:

Filers need to ask for this relief. If you do not ask, you will not receive.

Have you ever had an income tax penalty waived? How did you go about it? Or…have you, as a patriotic, red-blooded American always paid all penalties and calculated? Comment below and share your experiences!