IRS Penalty Abatement

Often times we have taxpayer’s requesting that the IRS stop penalties and interest from accruing on their accounts because that is the reason why they can never get their balances lowered even if they’re on a payment plan. It is important to understand how penalty abatement works and if you qualify for it.

I was employed by two large national companies that gave taxpayers the false hope that abating penalties is a type of “settlement” with the IRS and after the penalties are abated or “removed” they will no longer have any further penalties attached and the taxpayer can easily pay down their liability without further accruals. This is a not correct. Your tax representative is able to request for abatement of penalties that have ‘accrued to your account’ but they cannot STOP penalties from continuing to accrue. This section discusses two most common types of penalties and how a taxpayer (or their representative) can request an abatement (removal) of such penalties.

Tax Attorney Elizabeth Gonsalves Specializes in Abatement of
IRS Penalties and Corresponding Interest

Here is the run down on how penalties are added to taxpayer’s account.

First, there are different types of penalties that the IRS can assess on taxpayers. Each type of penalty is caused by a specific act allegedly committed by the taxpayer in different types of situations. Penalties types can include (but are not limited to) failure to file a return on time, failure to pay a tax balance on time, accuracy-related penalties for inaccurate disclosures on a tax return, civil fraud penalties in cases where fraud was detected in filed returns, etc. There are many more types of penalties involve, but the two most common penalties which most of our clients encounter are “failure-to-file” and “failure-to-pay on time” penalties. I will explain these two penalty types below:

Failure-to-file penalty – If you do not file your tax return by the deadline or extended deadline, you will face this type of penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty (explained later below). So if you cannot pay all the taxes you owe, you should still file your tax return on time and explore other payment options in the meantime. The penalty for filing late is usually 5% of the unpaid taxes for each month or part of a month that a return is late (without regard to extensions). This penalty will not exceed 25% of your unpaid taxes.

Failure-to-pay penalty – There is a common misconception that if you request an extension on a current year’s tax return, you don’t have to pay until the extension time. This is incorrect. The extension is only on time to file a return, but never on time to pay. You should always pay an estimated amount of what you believe you will owe for the tax year by the original due date of the return. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

Furthermore, if the unpaid balance is in collection stages with the IRS, meaning that the IRS has sent you a demand for immediate payment, then the failure-to-pay penalty will jump to 1 percent of your unpaid taxes for each month or part of a month after you’ve received this notice.

If you establish an installment agreement with the IRS considering that you also filed on time, then the failure-to-pay penalty will drop to ¼ of 1 percent of your unpaid taxes for each month or part of a month that a liability continues to exist.

Can these penalties be removed (abated)?

The IRS does offer taxpayers and opportunity to request an abatement of penalties provided that the taxpayer can show reasonable cause.

What is reasonable cause?

The IRS defines reasonable cause as having circumstances beyond your control that prevented you from filing your return or paying your taxes on a timely basis. Certain types of situations may correlate with the reasonable cause criteria, some of which are:

Death (of spouse, siblings, parents, grandparents, children) – You must explain how a death in your family prevented you from filing and paying your taxes on time. You have to explain how this situation had impaired your ability to perform other tasks and obligations such as being unable to continue to work, pay bills, attend to other financial matters.
Serious Illness – You must explain the illness and what type of impairment it caused/causes to you or, if related to a related party, explain how you were impacted of your duty to file & pay taxes on time due to an illness of another. You need to disclose the dates, duration, and severity of the illness or disability and how it correlates with your inability to file & pay your taxes on time. You must also explain how other financial obligations were impaired such as being unable to continue to work, pay bills, attend to other financial matters.
Unavoidable Absence – You must explain your situation on why your absence was unavoidable and prevented you from filing and/or paying your taxes on time. You must show that you acted in good faith and explain if efforts were made to comply with filing and paying your taxes on time. You must also explain how other financial obligations were impaired from this situation such as being unable to continue to work, pay bills, attend to other financial matters.
Inability to Obtain Records – An important aspect on this type of reasoning is to explain to the IRS your efforts to try and secure needed information to file your tax returns. You must explain why you were not able to use estimated information to substitute the missing records. People may have an inability to obtain proper records if there was a flood, fire, or other casualty that destroyed records (you must prove this casualty by showing proof that correlates with the proper time your tax return was due). Another possible issue is that you may be waiting for records from third-parties and they have delayed the records or failed to provide them to you entirely. You must address all your attempts to obtain the records and file your returns. Also, it is important to explain whether you called the IRS and asked for advice on the subject. All of your efforts to show “good-faith” will work in your favor when requesting abatement of penalties based on this reasoning.
Reliance on written advice from the IRS or advice from a tax professional – The IRS is very strict on this type of reasoning. Reliance on the advice of a tax advisor/professional is limited to issues generally considered technical or complicated. On many occasions, the professional tax advice should be in writing with the tax advisor’s name and address information. Your responsibility to file, pay or deposit taxes cannot be excused by reliance on the advice of a tax advisor. Therefore, if you failed to file a return or pay your taxes on time because your tax advisor stated that you won’t get penalized for it, this will not generally be acceptable to the IRS. You carry the ultimate responsibility in complying with tax law.
Can Penalty Abatement Work for You?
If you have several years of unfiled and unpaid tax returns, it is important to know what occurred during these years in order to determine if you meet the criteria for reasonable cause. You must also be aware that your statements for reasonable cause must be supported by documentation that proof certain element of your reasons. Penalty abatement on multiple years can be a difficult task to perform. Your tax representative will be able to assist you in determining if you have a case for penalty abatement. If we are able to determine that you have reasonable cause, we can take your case and prepare the required statements and forms to present to the IRS. You must be on a valid installment agreement before our representatives can work on penalty abatement cases for you.

What if I paid off my taxes in full and I believe I qualify for penalty abatement?
Even if you’ve paid off the entire balance on your IRS tax debt, you can make a request for a refund based on reasonable cause to abate your penalties on one or multiple years. However, you have only 2 years from the date you paid the debt to make this request. All rules are the same for making the request and you must meet reasonable cause criteria in order for the IRS to consider your request.

What if I have only one year of liability? Can I make a request to abate penalties even if I don’t meet the criteria for reasonable cause?
If you’ve had a good tax history with the IRS (meaning you’ve filed and paid your taxes on time for 3 years prior to having a tax liability come into existence), then the IRS may consider waiving failure-to-file and failure-to-pay penalties based on your “first time offense.” Your tax representative can assist you in claiming this special waiver.