Tax compliance: How $1,560 in penalties went away with a single phone call

Getting tax compliance notices from the IRS stating that you owe large amounts of money isn't fun. It doesn't hurt to call them about it …

I received two letters from the IRS over the weekend.

These weren't pleasant letters, as in, “We caught an error on your return and we owe you a larger refund.” (I have received those kinds of letters before.)

My wife had checked our mail, and was the first to see the letters.

“We have a problem,” she told me.

Two letters, one for each of the LLCs we do business under. Each one saying that we owed $780 in penalties.

The IRS said that we filed our partnership returns late. That's $195 per month or part of month that the return was late, for each partner, for each partnership. From the looks of it this weekend, the IRS was claiming that our returns were between one and two months late: $195 times 2 months, times 2 partners, times 2 partnerships, gives $1,560 in penalties.

Tax compliance: Why was the IRS after me?

I didn't get it. I thought sure I filed like I did the other years. We had sent the returns by certified mail. We dug up the receipts and checked to see if they had gotten there. They had.

Huh.

I called the service number in the letter the next morning (after verifying it on the IRS website, just to be safe).

I explained to the IRS representative that I had mailed the returns on April 12th.

She stopped me there. “You mailed them on April 12th? The returns were due March 15th.”

“Uuuuhhhh … they were due March 15th?! Did that change recently?”

“It changed this year.”

The IRS was right. I screwed up. Well … crap. I actually owe this.

Then she looked at the records. Over the next few minutes, she forgave the penalty assessed on the first LLC, and then on the second “based on our good record of past tax compliance.”

What contributed to this happy ending, and what I learned

1. I called promptly after receiving the letter. Probably the *worst* thing you can do is ignore the letter. I called the IRS the next day.
2. I went in wanting to fix the problem. Going in with this kind of attitude has seemed to work well. And to be fair, I didn't know what the problem was going into the call. I thought it was that the returns didn't get there somehow, but that was just a hunch, and an incorrect one.
3. I was polite. This should be a bit of a no-brainer. The person on the other end of the line is a person who deserves to be treated politely.
4. I admitted I was wrong when confronted with the rules. When I realized I goofed (unintentionally, of course) what else is there to do but own up?
5. I thanked them. I'd like to think that I would have thanked them for explaining even if they hadn't forgiven a dime.

Will this work all the time? No, but I can't see it hurting things.

The biggest lesson I learned in tax compliance

The biggest lesson I learned in tax compliance was to read the tax form instructions more carefully.

In other words, RTFI (read the fantastic instructions).

The Form 1065 I filled out this past year looked pretty much like the one from the previous year. But had I read the instructions for the form — even so far are the first section of the What's New section on the first page of the instructions I would have caught the change and not had to beg forgiveness.

No, really, here it is:

It's best to start looking at the forms before the end of the tax year. I'm not sure that this year, even if I had caught the date change, that I would have been able to file on time.

Any other business tax filing tips you have? Obviously I have a bit to learn! 🙂