Penalty abatement is a valuable tool that taxpayers can use to challenge IRS assessments of penalties when applicable. In many situations, it is possible to have these penalties waived by the IRS.
What is Reasonable Cause?
To qualify for penalty abatement, your case must demonstrate “Reasonable Cause,” showing that specific circumstances prevented you from filing or paying taxes on time. Examples of reasonable cause include illness, family issues, natural disasters, or extreme situations such as death. If these conditions are proven, it may be possible to have penalties waived. Additionally, if a penalty is waived, the associated interest can also be removed.
The IRS may consider waiving penalties if reasonable cause exists. This typically involves situations beyond the taxpayer’s control, such as fires or natural disasters. Serious illness or the death of the taxpayer or an immediate family member may also qualify. However, it’s essential to note that lack of funds alone is generally not considered a reasonable cause to waive penalties for unpaid taxes.
Documentation is Key
For a successful penalty abatement case, it’s best to include documentation that supports your claim of reasonable cause. The IRS conducts thorough due diligence in these cases and may request hospital records or documentation of any natural disasters. Be prepared to explain the circumstances that prevented you from filing or paying your taxes. While interest on a penalty may be reduced or removed when the penalty is waived, it will continue to accrue on the delinquent tax balance.
First-Time Abatement (FTA)
Taxpayers and businesses with clean compliance histories may be eligible for administrative relief from penalties associated with late filing or payment. To qualify for a First-Time Penalty Abatement (FTA), you must demonstrate no significant tax penalties in the three years preceding the current penalty. For example, if you received a penalty for your 2017 filing, you should have a clean tax record for filings from 2014 to 2016.
In addition to maintaining a clean compliance history, you must have filed all required tax returns and either paid or arranged to pay any taxes due. To request an FTA waiver, you may need to provide a written request explaining your situation.
Statutory Exception
The IRS may grant penalty relief if you received incorrect written advice from an IRS agent. To receive this waiver, you must present your written request for advice and the written advice you received from the IRS. Any oral advice may not be eligible for a statutory exception, so it’s essential to retain all communications from the IRS for your records.
Work With an Experienced Enrolled Agent
Managing tax laws and issues like penalty waivers can be complex, especially while running a business. If you’re facing tax debts, including significant penalties, consider working with an enrolled agent (EA). Unlike attorneys and CPAs, who are typically state-licensed, enrolled agents are federally licensed tax experts certified by the IRS. An EA can help you reduce or eliminate penalties and negotiate payments and settlements related to your tax debt.
Summary of Penalty and Interest Abatement
If you’ve recently received a penalty from the IRS, you may wonder if you can challenge the penalty and interest assessment. Fortunately, it is possible to contest penalties under certain circumstances, particularly if you can demonstrate reasonable cause for penalty relief. While interest on penalties may be waived when the penalty is removed, interest on any outstanding tax debt will remain.
For personalized assistance in addressing your delinquent tax liabilities, please fill out the form at LA-Twins. We are a local, family-owned company, and our team includes former IRS employees with first-hand knowledge of how the IRS and State DOR operate. At LA-Twins, we’ve been helping clients enhance their leads for tax reliefs for over 40 years. You can expect straightforward advice—no empty promises or unrealistic expectations.
