Doeren Mayhew: FAQ...Has IRS Fresh Start penalty relief expired?

FAQ...Has IRS Fresh Start penalty relief expired?

Yes, penalty relief under the IRS Fresh Start initiative was a one-time offer, which required individuals to file Form 1127-A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, by April 17, 2012.

Penalties

The Tax Code imposes penalties on individuals who fail to file a return when one is required to be filed and on individuals who fail to pay any tax by the due date. Often, taxpayers find that penalties can be more onerous than the taxes actually owed.

The penalty for filing a return late is generally five percent of the unpaid taxes for each month or part of a month that a return is late. The IRS has explained that this penalty will not exceed 25 percent of your unpaid taxes. Individuals who fail to pay their taxes by the due date, generally are liable for a failure-to-pay penalty of one-half of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid. The IRS has cautioned that the penalty can be as much as 25 percent of the unpaid taxes.

If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Generally, the period of delinquency runs from the day after the due date of the return until the return is actually received by the IRS. In determining the number of months for which the penalty is imposed, the due date of the return determines when months begin and end. Individual returns for 2011 were due April 17, 2012.

Fresh Start relief

In early 2012, the IRS announced special penalty relief for individuals who found themselves unable to pay their taxes by the April 17 due date. This relief was part of the IRS' "Fresh Start" initiative.

Penalty relief was available to two groups:

Wage earners who had been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17, 2012 deadline for filing a federal tax return this year.
Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
The taxpayer also had to have adjusted gross income of less than $100,000 (or $200,000 for a married couple filing a joint return). Additionally, the amount owed to the IRS had to be less than $50,000.

Under the Fresh Start initiative, interest runs on the 2011 taxes until the tax is paid. However, no failure-to-pay penalties will be incurred if tax, interest and any other penalties are paid in full by October 15, 2012.

Deadline passed

The IRS required taxpayers to file Form 1127-A to request penalty relief by April 17, 2012. At this time, it appears that the IRS is not bending this rule. However, the IRS could adjust its approach. If the IRS announces any changes, our office will keep you posted.

 Doeren Mayhew, a Michigan CPA Consulting Company, for more information.