Don't let fear of IRS penalties overwhelm you. You have options to reduce or eliminate them. A penalty abatement may be an effective solution. This comprehensive post explains what it is, when it applies, the IRS' reasonable cause criteria, and the process to potentially reduce or eliminate IRS penalties. Learn about the basics of removing penalties on the Guide to IRS Penalty Abatement.
What Penalty Abatement Is and When It Applies
What is it:
Penalty abatement lets taxpayers request relief from certain tax debt penalties and interest. Penalties can add up and increase owed amounts significantly. If you or your business have a tax debt, it is likely that you also have penalties and interest associated with it.
Penalty abatement may apply in first-time and reasonable cause situations.
First Time Abatements:
The First-Time Penalty Abatement (FTA) is a relief provision provided by the IRS that allows qualifying taxpayers to request forgiveness for certain penalties for the first time. It's an administrative waiver that can apply to failure-to-file, failure-to-pay, or accuracy-related penalties. However, not all penalties are eligible for FTA.
To qualify for First-Time Penalty Abatement, the taxpayer must meet specific criteria:
Clean Compliance History: The taxpayer must have a clean compliance history, meaning no penalties (except for estimated tax penalties) for the past three tax years before the year in which the penalty or penalties were incurred.
Timely Filed Required Returns or Extensions: The taxpayer must have filed all currently required tax returns or filed an extension of time to file.
Paid or Arranged to Pay: If there's a balance due, the taxpayer must have paid it or arranged to pay it. This doesn't mean that the entire tax debt must be paid off, but there should be a payment plan in place or proof of making an effort to pay.
Reasonable Cause Criteria
The IRS defines reasonable cause as genuine, valid reasons for noncompliance. Common examples include:
Natural disasters that prevented compliance: A hurricane or flood that caused severe damage to your home or business, resulting in the loss of important financial records and rendering you unable to meet tax deadlines.
Serious illness or death of self, family, or associate that hindered compliance: You or a close family member suffered a severe illness requiring prolonged hospitalization or passed away, making it impossible for you to focus on tax matters during that time.
Lost crucial records from fire or theft: Your residence or office experienced a fire or was subjected to theft, leading to the destruction or loss of essential tax documents, making it challenging to fulfill tax obligations.
Errors by tax preparers: Errors made by tax preparers can sometimes result in penalties for taxpayers. Taxpayers rely on professionals to accurately prepare their taxes, and errors made by these preparers could lead to penalties imposed by the IRS.
Here are some key points regarding errors by tax preparers and their potential impact:
Responsibility of Tax Preparers: Tax preparers are expected to exercise due diligence and accuracy when preparing tax returns for their clients. They are responsible for ensuring that all information provided is correct and that the returns are filed accurately and on time. Consequences of Preparer Errors: If a tax preparer makes mistakes on a tax return that result in underpayment of taxes or other compliance issues, the taxpayer may face penalties from the IRS. These penalties could include accuracy-related penalties or other fines for negligence or substantial understatement of income. Taxpayer Recourse: In cases where errors or negligence by tax preparers lead to penalties, the taxpayer may have recourse against the preparer. They may seek remedies through the preparer's professional liability insurance, filing complaints with regulatory bodies, or pursuing legal action if the errors were egregious or caused significant financial harm. Penalty Relief: If the IRS determines that the errors were solely the fault of the tax preparer, the taxpayer may be eligible for penalty relief. In such cases, the taxpayer should provide documentation and evidence to demonstrate that they relied in good faith on the tax preparer's expertise and advice.
5. Inability to obtain necessary records despite reasonable efforts: You made diligent attempts to retrieve essential documents required for tax filing but encountered unforeseen circumstances that prevented access, such as the closure of a business where the records were stored.
6. IRS errors or delays influencing noncompliance: You followed IRS instructions or guidance provided, but due to an error or delay on the part of the IRS in processing your information or providing necessary documents, you couldn't meet the tax deadlines.
Helpful Tips to Request Abatement
Essential steps to follow:
Form 843, Claim for Refund and Request for Abatement: This form is generally used to request the abatement of certain types of penalties, interest, or taxes. It's a multipurpose form that covers various types of claims, including penalties.
Form 843 Instructions: These instructions provide guidance on how to fill out Form 843 accurately and what information to include when requesting abatement. Use them to file the Abatement correctly.
Letter or Explanation with Supporting Documentation: In cases of penalty abatement based on reasonable cause or first-time abatement, you might not necessarily need a specific form. Instead, you can write a detailed explanation in a formal letter to the IRS, along with supporting documentation, to request penalty relief. Include your name, address, Social Security number, tax year(s) involved, a clear explanation of the circumstances, and any evidence supporting your claim.
Disclaimer: Before submitting any form or request for penalty abatement, it's advisable to review the IRS guidelines, specific instructions for the form you plan to use, and consider seeking advice from a tax professional or accountant. They can guide you through the process, ensure accuracy, and increase the likelihood of a successful penalty abatement request.
Getting expert help can guide you through the complex process and increase success.
Summary of our Guide to IRS Penalty Abatements:
Penalty abatement offers relief from burdensome IRS penalties. Understanding eligibility, especially reasonable cause, is key. Providing valid reasons and documentation can help reduce or eliminate penalties, restoring financial peace of mind.
Working with our team:
If you are dealing with IRS penalties, our team is here for you. We have dealt with thousands of cases that have have accrued penalties and interest . The experts on our team have helped countless individuals and businesses frictionlessly navigate IRS tax debts and penalties and get back on track. Contact us for a free consultation today!
IRS Codes Referenced:
Internal Revenue Code Section 665;
Internal Revenue Manual (IRM);
IRS Publication 1, Your Rights as a Taxpayer;
IRS Publication 17, Your Federal Income Tax