Penalty Abatement

How to Get an IRS Tax Penalty Abated

I receive calls from taxpayers all the time, and I ask them, "How much do you owe the IRS?" They respond with some number, and that number is almost always incorrect. That is because the IRS charges interest and penalties for filing late and for not paying the taxes, among several other things. I then proceed to call the IRS on their behalf to research the case, and when I tell them the actual balance they owe, including interest and penalties, they are astonished.

If I told you that there was a chance you could get these penalties abated, would you try it? The IRS allows taxpayers to request a penalty abatement, which will not only reduce penalties but interest as well. I can't promise it will work for you because it's a bit complicated, but it's definitely worth a shot.

In order to be eligible for a penalty abatement, the IRS has a series of guidelines that they adhere to. There are a variety of reasons the IRS will consider, including honest mistakes, major illness, and excessive hardship, to name a few. The IRS will assess each case individually, so be sure you have all the necessary evidence to back up your claim.

What Is the Reason for IRS Penalties?

The goal of assessing punishment is to induce voluntary compliance from the taxpayer. (IRS.gov, "20.1.1.2.1 Encouraging Voluntary Compliance," 8/14/2013). When a taxpayer makes a good faith attempt to meet all tax responsibilities of filing and paying on time, he or she is supporting the tenets of the Internal Revenue Code.

Can I get the IRS to grant a first-time penalty abatement?

A taxpayer may request a First-Time Penalty Abatement (FTA) of certain IRS penalties. A taxpayer may request an FTA if their penalties are due to:

• Unfiled Tax Returns
• Failure to pay estimated taxes on time

In addition, the taxpayer must meet the following requirements:

• has not been subject to any penalties in the three years before the year in which the penalty was imposed.
• The taxpayer could not have requested a penalty abatement for the previous year.
• is current on all filings or has an accepted and valid extension to file.
• has made suitable arrangements with the IRS to settle any outstanding taxes or has paid them in full.

As noted, FTF and FTP penalties and interest are only reduced or withdrawn when the penalty is reduced or withdrawn. On their website, the IRS also says that a taxpayer might be better off waiting to ask for FTA relief until the late tax is paid in full.

How to Request a First-Time Penalty Abatement?

You can request a FTA by calling the IRS, or you can fill out and submit IRS First Time Penalty Abatement Form 843. If you need instructions to complete the form, the IRS provides those as well.

Reasonable Cause Tax Penalty Abatement

Tax penalty abatements are difficult to get approved since the IRS does not want to discharge them without good reason. The Internal Revenue Manual, on the other hand, lists a number of "reasonable cause" reasons why taxpayers can dispute their tax penalty.

The IRS says that a tax penalty abatement is often given when a taxpayer takes normal care but still doesn't meet their obligations.

Based on my experience, I have listed the 7 reasons why the IRS generally accepts a Reasonable Cause Penalty Abatement. These can be used individually, or you can combine several explanations:

Ordinary business care and prudence (IRM 20.1.1.3.2.2)

Ordinary business care and prudence can be demonstrated by showing that the taxpayer made every attempt to comply with their tax responsibilities but was unable to do so due to circumstances beyond their control.

When deciding whether to waive a tax penalty for a good reason, the IRS takes into account:

• The taxpayer must have a compelling justification for requesting a penalty abatement. All appropriate explanations must correspond to the dates and circumstances that led to the penalties' being assessed.
• The IRS will look into the taxpayer’s compliance history.
• The time it takes the taxpayer to become compliant must be reasonable in light of the circumstances.
• The conditions described as the basis for a reduction in tax penalties must be truly beyond the taxpayer's control.

The IRS will look at all these factors in making its determination in regards to the penalty abatement.

2) Death, serious illness, or inability to work (IRM 20.1.1.3.2.2.1)

The most common reason for removing penalties is death, serious illness, or another serious medical condition.Even though no one wants to give the IRS personal information, it is important to document as much as possible about what happened that caused you to not pay your taxes.

The documentation provided should include:

• The severity of the illness (medical records, doctor's notes, etc.)
• relationship between the taxpayer and the person who is afflicted with the disease.
• Does any other information in regards to the illness seem pertinent?

3) (IRM 20.1.1.3.3.5) Fire, flood, or casualty

The IRS recognizes that due to a fire, flood, storm, or other disaster, you should not have to pay penalties for filing or paying late. This is especially true in places where a state or federal disaster has been declared.

It is very important that the taxpayer has the documents to prove that what they are claiming actually did happen.

4) Poor advice (IRM 20.1.1.3.3.4) and IRS mistakes (IRM 20.1.1.3.4)

Throwing someone else under the bus, such as someone from the IRS or a tax professional, is a very persuasive argument to have your tax penalties abated.

It only makes sense that if the IRS tells you something, you rely on it, and you suffer because of it, the IRS should remove the penalties.

When you use a tax advisor, on the other hand, you're admitting that you don't know much about taxes and putting your trust in someone who has been trained in these areas.

If this is true, you will want to provide substantiation such as letters, emails, or expert opinions to prove your case.

5) Unjustifiable hardship (IRM 20.1.1.3.3.3)

According to the IRS, an undue hardship is defined as something that is "more than an inconvenience to the taxpayer. In practice, this means that a taxpayer must show and prove a serious financial or personal disaster in order to get a tax penalty removed.

It is very rare for the IRS to accept this, and only these instances rise to the level that justifies abatement:

• Personal health is severely harmed. (i.e., cannot pay medical bills).
• Loss of primary residence
• Detriment to minor children or dependents (can’t pay for basic necessities such as food, clothing, or housing)

Of note, financial hardships usually have little impact on a taxpayer's ability to file. They are more likely valid reasons for failure to pay.

6) Lack of legal knowledge (IRM 20.1.1.3.2.2.6) [1]

Some taxpayers may be unaware of the need to file and pay certain sorts of tax responsibilities due to their education or previous work experience. As long as the taxpayer makes a reasonable effort to comply with the law, they can argue that they should not be fined for not knowing the law.

The IRS will look at how much education a taxpayer has, if they have dealt with this kind of tax before, if they have been fined before, and if there have been any recent changes to the law, reporting requirements, or forms that a reasonable person would not expect the taxpayer to know about.

7) Records cannot be obtained (IRM 20.1.1.3.2.2.3) [3]

I have had clients not receive the proper information from employers and have been successful in using this approach to remove penalties. The IRS wants to make sure what you file is accurate. If you don’t have the proper documents to file an accurate return, you will find it very difficult to be in compliance with the IRS.

Waiting until you have all the essential information to prepare a proper and correct tax return demonstrates the taxpayer's thoroughness. However, the IRS will factor in how long you knew you did not have the documents in question and what efforts you made to get the records when you found out about it.

To learn more, you can view the Internal Revenue Manual.

How to Request a Penalty Abatement for Reasonable Cause

Just like the FTA, you will want to use Form 843 to request a penalty abatement based on reasonable cause.

Penalties are a way for the IRS to punish taxpayers and to set an example of what will happen if you don’t file your return or pay the taxes due. The penalties and interest do not seem fair. Unfortunately, they are not going to go away unless you take action. If you believe you may qualify for a penalty abatement, get in touch with us.