The IRS is always on the lookout for defaulters and has the right to take action against them as per the law. When a taxpayer is unable to pay or file the taxes they owe, the obligation doesn’t cease to exist; it continues to accumulate interest and even penalties. Though the IRS continually tries to recover outstanding tax debt, it may agree to cut down on or waive tax penalties if a taxpayer is able to provide a satisfactory reason for their non-compliance. Read on to learn more about requesting an abatement of IRS penalties.
IRS Penalties Eligible for Relief
IRS penalty abatement is a provision for the removal of certain IRS penalties. If you believe that you shouldn’t be required to pay certain federal penalties, you may apply for IRS penalty abatement. If your request is approved, the IRS will remove all of your penalties. If you want to apply for penalty abatement, you can contact the Law Offices of Nick Nemeth. The penalties eligible for relief are divided into three categories:
- Failure to file tax return: This is the penalty for filing taxes late. A failure to file penalty may apply if you do not file by the tax filing deadline.
- Failure to pay taxes on time: This is a late tax payment penalty that may apply if you do not pay all the taxes you owe by the tax filing deadline.
- Failure to deposit certain taxes as needed or penalty for not paying taxes
Note: The IRS might consider other types of penalties depending on the intricacies of the case.
How to Calculate
Although both the penalties (penalties for not paying taxes and penalties for not filing taxes on time) are capped at a maximum of 25% of the unpaid tax, they are calculated differently. The Failure-to-File penalty is generally 5% of the unpaid tax for each month by which the return is late. The Failure-to-pay penalty is generally 0.5% of the unpaid tax for each month it is late. The IRS will assess penalties for partial months. If, for instance, one owed $100,000 on their individual income tax return and filed an extension but paid the total by October 15, the penalty would be approximately $3,000. If, however, in the same scenario, the taxpayer does not file an extension, the failure-to-file penalty may be capped, resulting in a much higher IRS liability.
Types of IRS Tax Penalty Relief
Unlike what many people think, the IRS isn’t an arbitrary tyrant, deaf to all reason. In fact, they’re quite open to hearing your case and reconsidering their original penalty ruling.
Can you get a penalty waiver and be in the clear once again? It depends. If you have a “reasonable cause” for failing your taxing duties, you can be eligible for the “first-time penalty abatement (FTA)”, also called simply IRS penalty abatement.
The IRS provides the following three primary types of tax relief:
1. Reasonable Cause
The most common causes of IRS tax penalties are also eligible for tax penalty abatement. Such cases include not filing your taxes or being unable to pay them by the set due date.
But, simply wanting these tax penalties to disappear isn’t enough. You have to show the IRS that you had a legitimate reason, or, in legal terms, reasonable cause, for not complying with your taxing duties.
As the name suggests, a reasonable cause for tax relief should be a reason that is purely objective. The IRS should be convinced that the taxpayer wanted to fulfill their Federal tax obligations, but was unable to do so because of uncontrollable circumstances.
Some of the reasons that could pass as a “reasonable case” include:
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Natural Disaster
Were your records and other important documents destroyed or lost during a fire, flood, or another natural disaster? This is a good enough reason for the IRS to waive your penalties.
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Social Unrest
Were you unable to leave from your home or job because streets were blocked off by a riot, manifestation, or crime scene? The IRS considers these cases serious disturbances that can prevent you from complying with your tax obligations.
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Physical Confinement
The IRS can’t blame you if being absent from your taxing duties was unavoidable. After all, how can you pay taxes if you are in a coma in the hospital or held hostage abroad? The IRS isn’t an evil monster and will be understanding of these extreme-case scenarios.
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Death of a Family Member
This one is self-explanatory. It’s impossible to go out and pay your taxes if you are dead. Another huge factor the IRS takes into account is having an immediate family member who took care of finances pass away.
If you have a valid reason for not paying or filing your taxes, then you are eligible for an IRS penalty abatement. But, before it is granted to you, you have to prove your case. This involves providing all the additional information necessary to evaluate your case.
You should provide any document that can work as evidence and clear up all surrounding circumstances. The IRS will also consider your history and whether this is a first-time or repeat offense.
At the end of the day, a tax law attorney will be your best resource in determining whether your situation is fit for penalty abatement. Seek consultation for the best IRS tax problem resolution.
Note: While lack of funds cannot be cited as a reasonable cause for failure to file or pay on time, it fulfills the reasonable cause criteria for the failure-to-pay penalty.
Related Blog: 6 Must-Know Facts about Penalties on Late Filing and Late Payments
What does the IRS Require?
Here are some of the facts that might be required by the IRS to determine reasonable cause:
- What happened and when?
- What facts and circumstances kept the taxpayer from filing their return or paying their tax on time?
- How did the facts and circumstances prevent the taxpayer from filing their return and/or paying their taxes or performing other routine duties?
- Once the facts and circumstances changed, what actions did the taxpayer take to file and/or pay their taxes?
- In the case of a Corporation, an Estate or Trust, did the affected taxpayer or a member of his immediate family have complete authority to execute the return or make the deposit or payment?
Related Blog: IRS Tax Problems a Debt Attorney Can Help You With
Documents Required
The documents accepted by the IRS in support of a reasonable cause claim include:
- Hospital or court records or a letter from a physician to prove illness or incapacitation, with specific start and end dates
- Documentation of natural disasters or other events that prevented the taxpayer from filing or paying tax
2. First Time Penalty Abatement
If a taxpayer has missed filing or paying their taxes for the first time, they may qualify for First-time Penalty Abatement (FPA). A taxpayer may qualify for FTA if they:
- Wasn’t required to file a return earlier
- Have no penalties for at least the last 3 tax years
- Have filed all currently required returns or filed an extension of time to file
- Have either paid or arranged to pay the due tax amount
Note: Taxpayers can claim an administrative waiver if they received any incorrect verbal advice from the IRS, which led to the non-compliance.
3. Statutory Exception
A taxpayer may qualify for a statutory exception if they received incorrect or erroneous written advice from the IRS. In such a case, they are required to furnish the following documents to support the claim:
- A written request for advice
- The erroneous written advice they relied upon
- The report, if any, of tax adjustments identifying the penalty or addition to tax, and the item(s) pertaining to the erroneous advice
Besides the above measures for tax relief, the IRS Independent Office of Appeals, also called the IRS Office of Appeals, can also be approached by a taxpayer for resolution regarding any tax dispute. The IRS Independent Office of Appeals is an autonomous organization within the IRS that assists taxpayers in resolving their tax disputes through an informal, non-litigation, administrative process.
Regarding Interest Relief
The IRS does not provide any interest relief, as such, because there is no law supporting it. Nevertheless, interest can be reduced if some tax penalties are waived.
The IRS charges interest on all unpaid balances. Interest accumulates daily and is charged until the balance is paid or settled. If any of the tax and/or penalties are reduced, the IRS automatically reduces the related interest. Interest is statutory and cannot be reduced or removed for reasonable cause or as a first-time abatement. The only way that the IRS will reduce the amount of interest that you owe is if the interest is due to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act. To check if you qualify for interest abatement, you should consult with an IRS tax attorney like The Law Offices of Nick Nemeth.
The Final Word
The IRS provides tax abatement for certain tax penalties, primarily in cases where it is impossible for a taxpayer to file their tax return or pay their taxes. Barring an FTA (or other administrative waiver), all types of provisions require a reasonable cause, supported by relevant documents and proof. It is best to take help for such IRS tax problems from a law attorney. If you are seeking resolution for abatement, penalty or any other tax debt problems, request help from the experienced IRS tax attorneys in Dallas at the Law Offices of Nick Nemeth. For a free, no-obligation consultation, simply call (972) 426-2991 or fill out our contact form, and we will take it from there.
