Penalty Abatement (PA)
The IRS has ways taxpayer can receive waivers for penalties and interest. Interest charged on a tax penalty is only reduced or removed simultaneous with the penalty being reduced or removed. The interest continues to compound and accrue until the tax is paid in full.
Note, before going to battle with the IRS you should thoroughly check the information contained within your notice to make sure its 100% correct. The IRS makes mistakes like everyone else, it’s unlikely, however you may find a mistake that will enable you to contact them and resolve the matter yourself.
First Time Penalty Abatement
A taxpayer may receive First Time Penalty Abatement (FTA) of certain IRS punitive actions assessed. FTA is applied to Forms 1040 and 1120 in addition to payroll and pass through entities. The taxpayer potentially qualifies for (FTA) if they have penalties associated with the following:
- Unfiled Tax Returns
- Failure to pay on time and or deposit taxes by due date
In addition, the following conditions must be met by taxpayer:
- Has not incurred any penalties for 3 years prior to the year the penalty was incurred.
- Can’t have a request from IRS for a previous year’s return.
- Is current on all filings or has an outstanding extension to file.
- Has paid or made satisfactory arrangements with IRS to pay any unpaid taxes due.
As noted, FTF and FTP penalties and interest are only reduced or withdrawn when the penalty is reduced or withdrawn. In addition, the IRS advises on their website that it may be to a taxpayer’s advantage to delay requesting relief under FTA until the late tax is paid in full.
A taxpayer can request relief for one tax period, which is categorized as FTA or other administrative waiver.
You can request FTA by calling the IRS at the number on your notice or by using the IRS E-Services Resolution Function. In addition, you can fill out and submit IRS First Time Penalty Abatement Form 843. The IRS has instructions for completing and submitting Form 843 for those doing it themselves.
Other Penalty Relief
In addition to FTA, the IRS may extend relief to taxpayer for other reasons. The burden is on the taxpayer to prove they meet the strict guidelines to qualify for abatement related to these other reasons. The types of penalties which qualify are identical to those given consideration for FTA such as FTF, not paying on time or deposit tax by date due.
Additional Types of Relief
- Reasonable Cause
- Statutory Exceptions
What is reasonable cause for IRS penalty abatement?
To get relief based on reasonable cause taxpayers must establish sound standards and prudence were employed reporting or fulfilling their payment obligations. You must have a legitimate reason your taxes weren’t paid, and the IRS must acknowledge that.
Examples of when a taxpayer may receive penalty abatement (PA) based on reasonable cause:
- Act of nature, such as weather-related issues including but not limited to tornado, hurricane, wildfires, earthquakes, floods, etc.
- Taxpayer is prevented from procuring their records for reasons beyond their control
- Illness, death or the absence of the taxpayer or member of their immediate family either of which impeded their ability to file, pay or make appropriate deposit.
- Tax preparer negligence
- Any other legitimate documented reason for failing to file or pay for reasons that are out of the taxpayer’s control.
A recent example of reasonable cause is the IRS extended deadlines for filing and paying to June 15th 2020 from April 15, 2020 resulting from Covid-19. Even with that extension it’s likely some taxpayers will still have a valid reasonable cause argument for PA. Covid-19 resulted in significant delays in IRS everyday functions such as live phone support, processing paper returns, answering taxpayer mail and reviewing tax returns. It’s likely that some may have valid PA or partial PA arguments as a result of this disruption.
IRS PA Reasonable Cause Request
Any request must be accompanied by facts and circumstances to support it. You must be thorough and specific in every area. This is an area an IRS lawyer may be able to help you. Present specific organized proof documenting all relevant facts.
Facts IRS suggests they require to determine reasonable cause:
- What happened and when.
- Facts and circumstances that prevented your filing or paying tax.
- How facts and circumstances impacted your ability to file and or pay.
- When facts and circumstances changed, what did you do to file or pay?
- In case of estate, trust or corporation did affected person or member of affected persons immediate family have sole authority to execute return or make deposit or payment.
Examples or proof needed to support claim of reasonable cause:
- 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 natural disaster.
- Police Records
To formally request reasonable cause, call the toll free number on your notice. You will then likely be asked to mail or fax all your supporting documentation and written statement to the IRS.
Statutory exceptions are infrequent and generally easy to document. An example of a statutory exception would be if taxpayer received incorrect written advice from the IRS. For inaccurate advice taxpayer must document the incorrect advice and the consequences. Anything less than actual proof is highly likely to be insufficient.
You’re entitled to administrative relief if you received incorrect oral advice from the IRS.
How do I request penalty relief due to statutory exception?
In most cases your request should be filed on the form 843 or call the toll free number on the notice. When you request PA based on statutory exception do the following:
- Provide copy of your written request for advice
- Provide proof of the erroneous advice given by the IRS
- Document any tax adjustments which correlate with penalty or more taxes incurred, and other items that legitimatize your claim.