IRS Penalty Abatement for First-Time Penalties and Reasonable Cause
IRS penalties can be very high. When you incur penalties for filing or paying taxes late, the penalties can cause your account balance to grow substantially. This makes it harder to get out of tax debt, but luckily, the Internal Revenue Service is willing to remove some penalties.
This process is called penalty abatement. In most cases, the IRS does not automatically decide to remove penalties. Rather, you must request to have the penalties removed. The IRS will remove penalties in a lot of different situations. But generally, it’s easiest to get penalties waived if you’re a first-time offender, if you have reasonable cause for incurring the penalties, or if you incurred the penalties due to incorrect advice from an IRS agent.
To get penalty abatement, you need to convince the IRS to remove the penalties. Applying for penalty relief is easier if you have an understanding of the tax laws. A tax professional can help you through the process. At the W Tax Group, we have extensive experience helping clients apply for reasonable cause relief or other types of penalty abatement. To get help with IRS penalties, contact us today. In the meantime, check out this guide to penalty relief and learn what to do if you’ve incurred IRS penalties.
What Is Penalty Abatement?
Penalty abatement is when the IRS agrees to remove penalties on your account. Penalty abatement can apply to nearly any penalty that the IRS has assessed against you. This is also called a penalty waiver or penalty relief. The process of applying for abatement varies depending on the type of penalty and the reason it was incurred.
What Type of Penalties Qualify for Abatement?
You can request abatement on a wide variety of IRS penalties. This includes the following:
- Failure to file tax penalty — This applies when you don’t file or you file a tax return late.
- Failure to pay penalty — This penalty comes into play when you file a tax return but don’t pay it.
- Failure to deposit penalty — Employers incur this penalty if they don’t deposit their payroll taxes on time.
If you incur any of these penalties, you can request relief regardless of the amount of the penalties. Generally, you can’t request relief for penalties related to fraud or tax evasion. You also can’t get an abatement for the trust fund recovery penalty, but you may be able to appeal this penalty if you can prove that you shouldn’t have incurred it.
These penalties are not a set dollar amount. They’re all based on your tax liability. They’re a percentage of the tax that you didn’t report, pay, or deposit. As a result, the amount of the penalty, and the amount of relief that you need vary drastically depending on the underlying tax obligation.
Interest on Tax Penalties
When the IRS assesses a penalty against you, the penalty gets added to your tax debt. When you have unpaid taxes, interest accrues on the balance. It starts on the day the return, payment, or deposit was due. The IRS also assesses interest on penalties. The interest typically starts the day that the penalty is added to your account, and then, it compounds which means that interest accrues on the interest. This can add up quickly. The interest rate varies, and it adjusts quarterly in line with the Federal interest rate.
Here’s some good news — if you qualify for penalty abatement, the IRS will also remove the interest that is associated with that penalty. You can’t get any other interest waived except in cases where the tax assessment changes or the interest was assessed in error. But if you successfully get penalty abatement, you will also shave a bit of interest off your balance.
What Is First-Time Penalty Abatement IRS?
First-time penalty abatement is when the IRS gives you relief because it’s the first time that you have incurred a penalty. You don’t have to explain why you filed or paid late. Basically, you just have to reach out to the IRS, and say, “Hey this is my first penalty.” Then, as long as you meet a few compliance requirements, the agency will remove your penalties. Keep reading for a more detailed look at IRS first-time penalty abatement.
This type of abatement is called an administrative penalty waiver, and again, you can request first-time abatement on penalties incurred for the following:
- Failure to file penalty on unfiled tax returns
- Failure to pay tax on time
- Failure to deposit payroll taxes by the due date
However, to get first-time abatement, you need to show that you are compliant with IRS reporting and payment obligations. Here are the compliance rules that you need to meet.
- You have filed the type of return that the penalty was assessed on for the last three years if required.
For example, say that you’re applying for relief for a late filing penalty on your 2022 tax return. You must have filed your 2021, 2020, and 2019 returns on time. Now imagine that you’re applying for penalty relief related to a payroll tax return due in 2022. You filed all of your payroll tax returns on time during 2021 and 2020, but you weren’t in business in 2019. In this case, you don’t have to demonstrate three years of compliance because you weren’t required to file for all three years. As long as you were compliant during the required time frame, you meet this requirement.
- You did not incur any penalties for the three years prior to the year the penalty was incurred.
Additionally, you have to show that you haven’t incurred any penalties for the last three years. However, if you incurred a penalty and had it removed for a reason other than first-time relief, you still meet this requirement. For instance, if you had a penalty removed as a statutory exception, you can still apply for first-time relief.
- You are current on all tax filings or have an outstanding extension to file.
To explain, imagine that you’re requesting first-time relief on penalties related to a 2021 income tax return. It’s the summer of 2023, and your 2022 tax return was due a few months ago. To meet this requirement, you must have filed that 2022 return or you must have requested an extension.
- You have paid or made satisfactory arrangements with IRS to pay any unpaid taxes due, aside from taxes related to the return the penalties were assessed on.
You can get penalty relief if you haven’t paid the tax that directly relates to the penalties, but you can’t claim relief if you haven’t paid other taxes. Here’s an example. Imagine that you are applying for relief for penalties related to a 2021 return. You also have an outstanding balance for 2020. You can’t get penalty relief until you pay the 2020 bill or set up a payment plan.
Although you can apply for abatement without paying the underlying tax, you may want to pay the tax first to avoid incurring additional penalties. Here’s an example, imagine that you owe $10,000 in federal income tax. Your payment is late so the IRS is assessing a late payment penalty of 0.5% every month.
That’s $50 every month. Right now, you’re three months late and have incurred $150 in penalties. If you request penalty abatement at this point, you will probably get it if you meet the criteria. However, if you haven’t made arrangements on the tax, the failure to pay penalty will keep accruing. That’s why in some cases, it can be more advantageous to pay or make other arrangements on the tax debt, and then, request penalty relief at that point.
How to Request First-Time Penalty Abatement Relief
You can request FTA by calling the IRS at the number on your notice. Alternatively, you can fill out and submit Form 843 (Claim for Refund and Request for First-Time Abatement). To fill out this form, you need basic information about the penalties you incurred and the tax return associated with the penalties. This includes the type of return, type of tax, and the tax period.
In section 5a of the form, you need to tick the box that says you’re applying for abatement for reasonable cause or another reason allowed under the law. Then, in section 7, you write out an explanation of why you deserve relief.
You can simply write that this was the first time you incurred penalties, and you want to request abatement. In contrast, if you apply based on reasonable cause, you should note your reasonable cause in this section. If you apply for reasonable cause and you qualify for first-time relief, the IRS will give you first-time relief. There is more on what reasonable cause means in the following sections.
What Is Reasonable Cause for IRS Penalty Abatement?
Reasonable cause is when you had a legitimate reason for paying the tax or filing the tax return late. It generally applies to struggling taxpayers affected by conditions outside of their control. To get relief based on reasonable cause, taxpayers must establish that they used ordinary business care and prudence to file or pay their taxes. You can’t get this type of relief if negligence or recklessness was involved.
You can apply for reasonable cause relief on late filing, late payment, or depositing late. You can also apply for reasonable cause on accuracy-related penalties in some cases. Here are some examples of when a taxpayer may receive penalty abatement based on reasonable cause:
- An act of nature such as weather-related issues including but not limited to tornados, hurricanes, wildfires, earthquakes, floods, etc. caused you to pay or file late.
- The taxpayer is prevented from procuring the records they need to complete their tax return for reasons beyond their control
- The illness, death, or the absence of the taxpayer or member of their immediate family impeded their ability to file, pay or make deposits.
- System issues caused a return or deposit to process later than expected.
- Any other legitimate documented reason for failing to file or pay for reasons that are out of the taxpayer’s control.
When you request abatement, you will need to write out your reasoning on the application. A tax advisor can help with this process. Generally, you won’t qualify for reasonable cause if you incurred a penalty in one of the following situations:
- Your tax professional filed or paid late. As a taxpayer, you are responsible for paying and filing on time, and you should get proof that your tax preparer followed through with their job.
- You didn’t understand the tax law. Unfortunately, ignorance of the law is not a valid reason for paying or filing your tax returns late.
- You made a mistake. You may be able to use this reason if you can establish that you tried to comply with the tax law, but in general, you’re expected to review your return for mistakes.
- You don’t have the money. An inability to pay is not considered reasonable cause. However, in this case, you may qualify for relief under the currently not collectible status.
When you reach out to a tax attorney, they can talk more with you about reasonable cause. When you explain your situation, they can let you know if you’re likely to get relief for those reasons or if you should take another approach.
How to Request Penalty Relief Based on Reasonable Cause
You can request relief by filing Form 843. Any request must be accompanied by facts and circumstances to support it. You must be thorough and specific in every area. You need to present clear well-organized proof documenting all relevant facts. This is an area an IRS lawyer may be able to help you.
When establishing if you had reasonable cause, the IRS looks at the following factors:
- What happened and when.
- The facts and circumstances that prevented you from filing or paying tax.
- How your situation impacted your ability to file and/or pay.
- What you did and how quickly you acted when the situation changed.
- In the case of estate, trust, or corporate return, the IRS will also consider who had the sole authority to execute the return or make a deposit or payment.
Again, you need to provide proof of your claims. Here are some examples of documents that you might use:
- Hospital Records
- Court Records
- Physician letter with start and end date documenting illness or incapacitation.
- Documentation of natural disasters, etc.
- Death Certificate
- Insurance records documenting a natural disaster.
- Police Records
You can include these documents with your relief application. If you request relief over the phone, you will be asked to mail or fax all of your supporting documentation and written statements to the IRS.
Reasonable Cause or First-Time Penalty Relief Sample Letter
If desired, you can write a letter to request penalty relief. You should include the following in your letter:
- Your name and tax ID number.
- The tax form and tax period.
- The notice number and date if you’ve received a notice.
- The type of relief (first-time or reasonable cause).
List this info near the top of the letter. Then, write out that you’re requesting relief and explain that you meet the criteria. To be on the safe side, you may want to note the tax code or statute that applies to each compliance requirement. Then, sign your name.
When applying for relief, it may be easier to just use the form. If you want to ensure that you include all of the right details on your penalty relief letter, you should consult with a tax attorney.
Penalty Abatement for Statutory Exception
Statutory exceptions are infrequent and they’re generally easy to document. An example of a statutory exception would be if a taxpayer received incorrect written advice from the IRS. For inaccurate advice, the taxpayer must document the incorrect advice and the consequences. Anything less than actual proof is highly likely to be insufficient.
For example, say that you were working with an IRS agent, and they sent you an electronic message or a letter than said your tax return was due on October 15, but it was actually due on April 15th. You filed the return based on the deadline they gave you, but because it was late, you incurred a penalty.
In this situation, you can reach out to the IRS, and you can provide them with a copy of the message you got from the agent. Then, the IRS can go in and remove your penalties.
How to Request Penalty Relief Due to Statutory Exception
In most cases, your request should be filed on Form 843, or you can call the toll-free number on the notice. When you request penalty abatement based on statutory exception, you should do the following:
- Provide a copy of your written request for advice.
- Provide proof of the erroneous advice given by the IRS.
- Document any tax adjustments which correlate with the penalty or more taxes incurred, and any other items that legitimatize your claim.
Partner with a Tax Attorney Who Can Help With Tax Penalty Abatement
If you believe you qualify for penalty abatement, or you simply need assistance with another tax matter, get in contact with us at The W Tax Group. Claim your free tax liability analysis today by calling 877-500-4930 or by filling out the form down below.