2014–15 tax guide: Filing and reporting requirements

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Individuals and businesses both face myriad filing, reporting and payment requirements. Failure to follow the rules can prompt contact from the IRS, but a notice doesn’t necessarily mean an audit. It may be possible to clear up the issue with the help of a tax adviser. If you did make a mistake, there are ways to abate a penalty by establishing reasonable cause or showing the IRS that it’s the first time you or your business has been penalized. Of course, the easiest way to avoid problems is to prevent an inadvertent misstep, so make sure you understand your filing and payment requirements.

The IRS offers automatic extensions for many of the biggest annual filing deadlines, including annual income tax returns for corporations, individuals, partnerships, trusts, estates and nonprofits. If you’re not going to meet a filing deadline, don’t bury your head in the sand. Filing for an automatic extension is typically painless and can spare yourself penalties for missed deadlines. But remember that filing an extension extends only the deadline for filing your return, not the tax payment. You must pay any outstanding balance in your income tax in full with your extension, to avoid interest and potential penalties.

Tax reference guide

Responding to the IRS
You met your deadlines, followed the rules, saved your receipts, and documented your expenses, time and income. You did everything your tax adviser asked you to do, but you still received a letter from the IRS. Don’t panic.

The IRS routinely sends hundreds of thousands of notices each year to taxpayers large and small. These letters are often computer-generated because what you filed doesn’t match what the IRS expected you to file. These mistakes can result from anything from a mismatched Social Security number on a Form W-2 to income from a Form 1099 that wasn’t reported on an individual’s tax return.

A notice doesn’t necessarily mean you’re being audited. It simply means the IRS detected a discrepancy between what it expected you to file and what you did file. Sometimes the IRS makes mistakes, too. Nonetheless, if you receive a notice, don’t ignore it, even if you think it was sent in error. If you did make a mistake, you want to correct it as soon as possible. The longer you wait, the more the error can cost you in interest and potential penalties. If the IRS sent the notice erroneously, responding promptly makes it easier to correct the error.   

Notices from the IRS often come with penalties. Remember, some of the penalties increase if the failure is intentional or due to reckless disregard of the tax law.

Planning tip: Abate a penalty
You don’t have to accept an IRS penalty on its face. There are many opportunities to abate it. The IRS can impose penalties for a variety of failures by a taxpayer. Sometimes these notices can be resolved with a simple letter to the IRS explaining that the taxpayer’s mistake was due to reasonable cause. This is essentially an argument that the taxpayer was acting responsibly and the mistake was unintentional. It can also mean that the penalty should be abated because the mistake was made not by the taxpayer, but by someone else, like a tax adviser.

A taxpayer can rely on several arguments to abate penalties, including the following:
  • First-time abatement — If you’ve never been penalized, you may be eligible for a first-time abatement. This program won’t free you from every type of penalty, but for many common failures, the IRS will waive the penalty under this program.
  • Corrective measure — If you have been penalized in the past, you can still show that you’ve made changes that have prevented failures in subsequent years.
  • Acted reasonably — You may also be able to show that you’ve exercised ordinary business care and prudence, and that the error is isolated and inadvertent, not intentional.

The IRS’s own policy is to impose penalties to enhance voluntary compliance. A taxpayer who has been compliant in the past, aside from an isolated error, isn’t going to become more compliant based on a penalty. Taxpayers may be able to demonstrate that penalties in these cases don’t serve the IRS’s policy of voluntary compliance.

Don’t panic
Remember, a notice from the IRS isn’t necessarily an audit. Often, it is an automatically generated letter sent because of some discrepancy detected by the IRS’s computers. Taxpayers can make inadvertent mistakes, as can the IRS. The key to successfully concluding any open matters with the IRS is to carefully respond in a timely manner. There are tax professionals who routinely deal with the IRS and know how to frame arguments effectively in language understood by the IRS’s revenue agents. Call a Grant Thornton tax professional if you need assistance with any notice from the IRS.

David Walser
+1 602 474 3410

Dustin Stamper
+1 202 861 4144

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