Tax season can be a stressful time, especially when unexpected penalties or deductions complicate your finances.
Whether you’re dealing with IRS penalties, looking to maximize deductions before they expire, or trying to protect your tax refund, this post has you covered.
Got IRS Penalties? Know the Rules
If the IRS has recently claimed that you owe a penalty for late filing, late payment, or missed employment tax deposits, pause before making any payment. You may not have to pay that penalty at all.
The IRS often imposes steep penalties for filing tax returns late, failing to pay taxes on time, or not depositing employment taxes correctly. However, several strategies can help you get those penalties removed—and in some cases, even refunded if you have already paid them.
Common IRS Penalties and Their Impact
Some of the most common penalties include:
- Late filing penalty. For individual or C corporation returns, this can be up to 5 percent of the unpaid tax for each month the return is late, maxing out at 25 percent. Partnerships and S corporations can incur penalties of $245 per partner or shareholder per month.
- Late payment penalty. This penalty is generally 0.5 percent of the unpaid tax per month, maxing out at 25 percent.
- Penalty for failure to deposit employment taxes. This penalty ranges from 2 percent to 10 percent, depending on how late the deposit was.
Strategies for Relief
Here are a few ways to potentially avoid or reduce these penalties:
First-time abatement. If this is your first time receiving a penalty—or your first time in over three years—you may be eligible for a “first-time abatement.” This is one of the easiest and most common ways to remove a penalty. It applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. As long as your tax compliance history is clean, you may qualify.
Partnership relief. If your business is a partnership with 10 or fewer partners, and if all partners filed their tax items on time, you may be eligible for relief under Revenue Procedure 84-35. This is a little-known but effective option.
Reasonable cause. If neither of the first two options applies, you can request penalty relief by showing that there was a reasonable cause for your late filing or payment. This could include illness, a natural disaster, or other significant life events that impacted your ability to meet IRS deadlines.
Next Steps
If you believe any of the penalties you’re facing may qualify for relief, you may be able to remove those penalties with a simple phone call. Using the right approach and trigger words when speaking to the IRS can make all the difference.
If you have already paid the penalties, you can use IRS Form 843 to file for a refund if you do so within three years of filing the return or within two years of paying the penalty.
QBI Strategies
As you may be aware, the qualified business income (QBI) deduction introduced by the Tax Cuts and Jobs Act provides a valuable tax-saving opportunity for business owners.
Unfortunately, the QBI benefit expires after 2025, so there is a limited window of time to maximize this deduction.
The QBI Deduction
The QBI deduction can be as much as 20% of qualified business income for eligible business entities, including sole proprietors, partnerships, S corporations, and certain LLCs. However, there are limitations, particularly for high-income earners or those in specified service trades or businesses (where the tax code for high-income phases out the deduction completely).
QBI Strategies
To make the most of this deduction, consider the following strategies:
Business Aggregation. If you own multiple businesses, combining them for QBI purposes may increase your deduction.
Carefully Manage Depreciation. Adjusting your approach to depreciation deductions can impact your taxable income and QBI.
Review Retirement Contributions. Large deductible retirement plan contributions can reduce your QBI deduction.
Filing Separately. In certain cases, filing as “married filing separately” may result in a higher QBI deduction, but it requires careful evaluation.
Consider the above strategies to maximize the QBI deduction before it sunsets in 2025.
Tax Refund Offsets
If your tax return shows a refund, you probably expect the IRS will pay that total amount when it processes your tax return. Unfortunately, this is not always the case.
The Treasury Department can and does deduct from your tax refund certain debts owed to various government agencies. Such a deduction is called a “tax refund offset.”
The Department of the Treasury Bureau of the Fiscal Service (BFS) processes tax refunds and runs the federal Treasury Offset Program. BFS is not part of the IRS.
Common Offset Debts
If you owe any of the following types of debts, the creditor agency can notify BFS to add your debt to its database of delinquent debts:
- Child support
- Spousal support
- State income tax
- Federally insured student loans
- Debts owed to federal agencies such as the Small Business Administration
- Unemployment compensation debts
The IRS can deduct unpaid federal income taxes from refunds, but this is not part of the Treasury Offset Program
Notice of Intent
A refund offset shouldn’t be a surprise, because you must be given notice before it occurs. The agency involved must send you a notice of intent to offset the debt at the name and address on file, at least 60 days before referring the debt to BFS (65 days for school loans).
Responding to Notice
Once you receive such a notice, you must act quickly to avoid the refund offset:
- You can prevent a refund offset by paying what you owe or entering into a payment plan with the creditor agency
- You can request a review by the agency if you believe you don’t owe the debt or the amount owed is incorrect (you must submit evidence proving this)
Contact the agency that imposed the offset, not the IRS or BFS. Neither the IRS nor BFS has the authority or the necessary information to help you
Contact the IRS only if your original refund amount shown on the BFS offset notice differs from the refund amount shown on your tax return.
Injured Spouse Relief
If you filed a joint tax return and the debt was owed by your spouse, not you, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. The IRS will compute your share of the tax refund and pay it to you.
The easiest way to avoid an offset is to have no tax refund (or a small refund). To avoid a refund while also avoiding penalties for underpaying your taxes, you must be sure that your withholding and/or estimated tax payments match the amount of tax you owe for the year. This isn’t always possible, but it should be your goal.
In any event, large refunds are not good tax planning—they are an interest-free loan to the IRS.
Contact your tax and financial advisors to determine the best moves for your situation.