Amended returns - late payment penalties

[appelman]

On amended returns with a balance due, is it appropriate for the IRS to assess a late-payment penalties dating back to the due date of the original return (in addition to interest)? I am thinking in particular of "elective" amendments, where there is nothing wrong with the original return. It is just that the taxpayer finds that a different approach will be more beneficial. A common example might be an amendment to role back a Sec. 179 election.

This has just come up for me with amended returns to apply community property laws retroactively to California RDP's, which is optional for years before 2010. The result was that one partner ended up owing money, while the other got a larger amount as a refund. The IRS slapped a substantial late-payment penalty on the amended return with the balance due. The agent on the Practitioner Priority Line ended up abating the penalty, but he was adamant that it was appropriate to assess it in the first place. Is he right?

[JohnH]

You'll have to wait for someone else to provide a cite, but I think he's probably right. After all, when you file an amended return with a balance due, you're in essence saying "This is what I should have owed, but I didn't pay it at that time". This would be true for an underreporting of income or overreporting of deductions in any situation, irrespective of the fact that it may be an elective filing of some sort.

Whenever I discuss an amended return with a balance due, I always assume about 1-1/4% per month combined interest and FTP penalty, and maybe an estimated tax penalty thrown in as well.

[taxea]

yes it is policy of IRS to assess penalties but it is also easy to get them waived if it is a civil rather than criminal penalty

[appelman]

Well, I'm still surprised.

Well, I'm still surprised. I don't think I've ever run into it before, and I've done numerous amended returns with balances due. It messes up the nice logical symmetry: you owe money, you pay interest; you get a refund, you receive interest. Also, it seems to be lousy tax administration. It discourages people from correcting errors that are in their favor, encouraging them to figure that probably no one will catch it.

[thomtax]

Well, I'm still surprised. It messes up the nice logical symmetry: you owe money, you pay interest; you get a refund, you receive interest.

Don't understand why you are surprised. The taxpayer got the use of the money for this period and possibly made more off it than they charged him.

Also, If your original scenario is correct, it fits perfectly into your "symmetry" example - They owe money, they pay interest.

Not picking on you, just passing on my thoughts.

LT

[appelman]

It's not the interest

It's not the interest, it's the late-payment penalty that disturbs me. The IRS doesn't offer to pay a penalty on top of the interest if they owe you money. Therein lies the asymmetry.

[JohnH]

The FTP penalty is really just a surcharge on the interest for an individual taxpayer. Since the interest isn't deductible, there's no practical difference between interest and the FTP penalty. Add the two together and you get about a 13% APR.

If taxpayers only had to pay the statutory interest, there would be a strong incentive to deliberately underpay, since the interest rate is roughly what a taxpayer would pay on a HELOC, and considerably less than the rate on an unsecured loan or credit card at normal rates. So IRS has to add the FTP penalty as a hammer to keep people from borrowing from the government at rates equal to (or less than) their other borrowing alternatives.

IRS adds a scare factor by calling it a penalty (sometimes it even scares preparers) , but in reality it's all just a charge for the use of money. Add the FTP penalty and the stated interest, and you have the true interest rate on the unsecured loan from the treasury. For some people who have limited options it's still a bargain; there are no transaction costs to obtain the "loan" and it doesn't affect their credit score or their visible balance sheet (unelss a lien is filed).

[appelman]

If you want to play that game

If you want to play that game, how about overpaying and lending the government money at 4%, when your savings account is only getting 0.1%? I still consider the penalty to be poor tax administration.

[gkaiseril]

Revenue Procedure 2005-18

See Rev Proc 2005-18 for information about making a deposit for a possible tax liability.

http://www.irs.gov/irb/2005-13_IRB/ar15.html

This replaces Rev. Proc. 84-58.

[OtisMozzetti]

reasonable cause

The penalty can be and should be waived if the taxpayer(s) acted in good faith and had "reasonable cause". The reasonable cause in this instance is that the IRS apparently did not, at the time they originally filed the returns, recognize the community property rules determined in California for RDPs.

The argument would go that, in good faith reliance upon the IRS position at that time, they filed the returns without considering the community property rules.