If the Internal Revenue Service has assessed a penalty against you for failure to comply with tax rules, you’re not alone. In 2012, the IRS assessed a total of $26.8 billion dollars in penalties against 37.9 million taxpayers. Sometimes circumstances prevent you from meeting your obligations to the IRS despite your best efforts. If that is the case, it may be possible for you to reduce or eliminate your tax penalty by requesting an IRS penalty abatement. The agency will consider your situation and, if it decides that you qualify, it may remove the tax penalty so that you are no longer responsible for paying it. In 2017, the IRS abated nearly one-third of all penalties assessed, totaling approximately $9 billion dollars.
Types of Tax Penalties
There are basically three types of assessments that are eligible for IRS penalty relief:
• Failure to deposit taxes
• Failure to pay a penalty
• Failure to file a tax return
The IRS is unlikely to charge a penalty against you if you make arrangements with the agency to meet your obligations. For example, if you filed for an extension on your tax return allowing you to submit it at a later date, that would not be a violation of IRS rules, so there should be no penalty. Similarly, if you enter into a plan with the IRS to pay your taxes in installments, that doesn’t qualify you for penalties as long as your payments are current. If you fall behind on your payments, however, the IRS could assess a failure-to-deposit penalty.
Types of IRS Penalty Abatement
Just as there are different types of penalties, there are different types of IRS penalty relief:
• Statutory exception
• Administrative waivers
• Reasonable cause penalty abatement
Each has its own qualification requirements and applies to different situations.
Not all penalties are eligible for abatement. One of the most notable exceptions is the estimated tax penalty, which may be assessed against businesses or individuals who are self-employed. If you owe an estimated tax penalty, you cannot receive an abatement for it. On the other hand, it doesn’t count against you as a past penalty when requesting a penalty abatement.
Statutory exceptions to penalties deal with specific circumstances. The example cited by the IRS is receiving written advice from the IRS that is incorrect. In other words, if it was the IRS’ fault that you failed to comply with the rules and incurred a penalty, the agency may remove the penalty if you can demonstrate that the advice you received was erroneous. To do this, you will have to submit the erroneous advice you received, your original written request for the advice, and any tax forms that relate to the incorrect advice and the penalty assessed. Other situations in which a statutory exception may apply include the following:
• You’re in a combat zone
• You’ve recently become disabled
• You’re newly retired
• You owe no tax liability for the preceding year
Reasonable Cause Penalty Abatement
If a circumstance beyond your control prevented you from filing and/or paying taxes or penalties, the IRS may consider that a reasonable cause for penalty abatement. These circumstances include the following:
• Hospitalization, incarceration, or inpatient drug rehab
• Serious illness and/or death of a family member
• Fire or natural disaster
• Accidental destruction of records
A reasonable cause penalty abatement is relatively easier to obtain than other types of penalty relief. This is because, instead of feeding your information to a computer, your case will be assessed by an IRS employee.
However, you still have to demonstrate that you qualify. This means providing documented evidence of the circumstance, particularly in regard to the date(s) that it occurred. In addition, you must also be able to demonstrate through documentation that you made a good faith effort to meet your obligations in spite of the circumstance.
Though not impossible, it may be more difficult to receive a reasonable cause penalty abatement if you have past penalties on your record. The IRS may be reluctant to offer assistance if you have a history of violating the rules.
The IRS is clear that simple lack of funds is not enough to qualify for a reasonable cause abatement for a failure-to-deposit or failure-to-file penalty. However, these situations may qualify for a first-time penalty abatement.
First-Time Penalty Abatement
The first-time penalty abatement is the most widely available type of administrative waiver. However, many qualifying taxpayers do not understand it and so fail to take advantage of it.
Basically, the IRS may waive an eligible tax penalty if it is the first they’ve ever assessed against you and you are otherwise in good standing with the IRS. In other words, if you haven’t had any tax penalties in the past and have a history of filing and paying your taxes on time, you may qualify for a first-time penalty abatement.
Estimated tax penalties do not count against you when requesting first-time penalty abatement, so if these are the only types of penalties you’ve incurred, you may still qualify. Similarly, if you have a history of making arrangements with the IRS to file or pay taxes after the due date, that should not count against you.
If your request for a first-time penalty abatement is rejected but you still believe you qualify, you should ask your assigned IRS agent to reconsider the assessment. This is because the IRS uses a decision-support software tool to decide who qualifies for this form of penalty relief, and it has a known history of inaccuracy.
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