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Aftermath of Filing Late Tax Returns

By Edited Dec 11, 2013 1 5

What Happens After You've Filed Your Taxes Late

If you neglected to file a US tax return (or several of them) on time, you might think that filing the late returns and paying what’s due is the end of the story.  It’s not.  The IRS wants you to chip in for a few more things, like interest and penalties.  And they will pay those for the oldest tax return first, even if that means you won’t be paying anything on later tax returns.

Let’s back up

Uncle Sam

Suppose you filed a late return for five years worth of income.  When you filed, you also gave the IRS a check for the tax that you owed.  Then you waited, assuming you would get a bill for the penalties and interest. 

Six months or so later you’ll start getting notices about what has been paid.  The first thing you’ll see is that, for the years in which you didn’t owe any taxes, there are no penalties and no interest due.  Yay!  The next thing you’ll discover is that the money you paid was first applied to the oldest year’s taxes AND penalties and interest.  This means that later years were not paid at all and are still accruing interests and penalties.  Thanks IRS.

If you file a tax return (on time) while in the midst of all this and will be getting a refund, the IRS will kindly keep that refund and apply it to the money you owe them.  Thanks again.

The interest and penalties accrue DAILY. This means if you wait until you get a statement in the mail, you will owe more than you would if you called, or went to the office to get the number.  This is important because the IRS takes months to send statements.  Months. 

To pay off the amount in full you need to go to the office[2] with a checkbook, get the exact amount owed and write them a check right then.  They should print out what you owe, stamp it “paid” with the date on it and give it to you.  Keep this for your records.  I assume that eventually we’ll get a statement that shows everything paid, but we’re still waiting and it’s been more than a month. 

Mitigating the penalties[1]

There is nothing your can do about the interest; you have to pay it. I’ll get to the “pay the IRS pennies!” claims that you see on TV, but let’s start with realities.

The penalties are considered as separate amounts for each year, not a lump sum.  The IRS agent in the office can forgive one year of penalties at his or her discretion.  This is not something I found anywhere on the internet while searching; the agent told us.  This is a great reason to be as nice as possible to everyone in the IRS office; they have powers we don’t know about.  The First Time Abate has rules attached to it and can only be applied to the first year, and only once.

If a penalty is removed, all of the interest that has accrued on that penalty goes away.  Yes, not only do they assess a penalty, they charge you interest on it.  This complicates all the math, which is another reason to go to the office and get the number.  If the penalty is removed on the oldest year in which taxes were owed, the amount you should have paid goes down, and the amount they took out of the first big lump sum goes down.  Now, more of this money is retroactively applied to later tax years which means that interest owed will also go down.  There isn’t anything you can do change how they do this, just be aware of it.

Request Leniency

Luxurt Tax
Pay the penalties even if you will be requesting leniency.  If your request is denied you’ll pay more interest on the penalties. If the request is approved, you’ll get money back.

The next step is to request leniency, or, as my friend calls it, “The Whiny Letter”.  I imagine that the IRS is pretty good at spotting bull ****, so unless you have a really good reason for not filing, this probably isn’t worth your time.  According to the IRS, good cause includes things like medical, no access to records or bad advice from the IRS or a tax advisor.  The IRS does look at times, so if you have brain surgery in January, that won’t fly as an excuse to not file in April.  The advice the agent gave us was to include as much detail as possible including dates and who was handling your finances.  Don’t be vague, and remember that they can ask for proof of anything you’re claiming. 

If your failure-to-file was caused by the IRS through some error, that’s a different story.  Just be sure you can prove it.  Actually, if you can show IRS error, you’ll get the interest removed as well.

Form 843

You will need a separate form 843[3] (Request for Abatement) for every year that you want leniency, and every form will need to be accompanied by a Whiny Letter.  It can be the same letter if one event covers multiple years.  The amount you want to have removed is the “Total FTP” number on the IRS printout.  If you are claiming IRS error, I don’t have any information for you.  Ask the agent or call the IRS.

And then, you wait.  And that’s where we are.

A note about “Offer In Compromise[4]

That’s what the shills are touting when they tell you they can get your tax liabilities reduced.  The reality of being able to use this avenue is very limited. You need to be pretty much destitute to even apply.  Do you have money in the bank?  You don’t qualify.  A job? Probably don’t qualify.  A car?  Nope.  If the IRS feels that you can pay them even $10 a month, they will expect you to do it.  Still want to try?  It will cost you.

You can offer either a lump sum or periodic payments.  You will need to send in an initial payment and a filing fee of $150.  The money you send is applied to your tax liability while you wait – and you can wait up to two years.  If your offer is accepted, you must adhere to the proposal you sent them.  If your offer is refused you can reapply, send them another payment and another application fee.

Bottom line: Very, very few people can use this, and you can probably go through the preliminary steps without the help of some yahoo from a television commercial.



Aug 13, 2013 6:16am
I hate income taxes and I hate the IRS (I've been jacked around by them in the past). But I liked this article, and extra points go for telling people to avoid those "settlement" companies. You are correct--the IRS, surprisingly enough, will work with you on a payment plan themselves (for free!--uh, except for any late fees and penalties that will continue to accrue against your outstanding balance). A thumb.
Aug 15, 2013 8:13am
Thanks Vic, and I hope you've come to some sort of understanding with the IRS and have penned some uneasy truce. When I read up on what those settlement companies do, I was just angry. They take advantage of people in a tough situation.
Aug 15, 2013 12:51pm
I did, and they DID surprise me with how flexible they were--as I said, they just want their money!
Aug 14, 2013 5:23pm
JestMe, you saved a lot of people money with your great article. I never knew that the IRS could forgive your penalty at its discretion. I like the way you pointed out the legitimate reasons why they might be leninent toward a taxpayer. They are compassionate most of the time if you are honest. Terrific article!
Aug 15, 2013 8:14am
Thanks Curiosity! The IRS may not be everybody's favorite entity, but the agents I've spoken to have all been helpful.
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  1. "Part 20: Penalty and Interest." IRS Manual. 21/07/2013 <Web >
  2. "Local Offices." IRS. 21/07/2013 <Web >
  3. "Form 843." IRS. 21/07/2013 <Web >
  4. "Offer In Compromise." IRS. 21/07/2013 <Web >

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