Incurring IRS penalties can be costly. Although there are over 150 different IRS civil penalties ranging in severity, the three most common types issued are:
- Failure to Pay (FTP) penalty. FTP arises from not paying the taxes owed when due. The penalty accrues at 0.5% per month of the tax balance due and maxes out once 25% is reached.
- Failure to File (FTF) penalty: FTF starts once the tax return has not been filed by the due date and accrues 5% per month on the balance due, maxes out once 25% is reached. This penalty accrues tens quicker than FTP. Even if you cannot pay the tax due, filing the return on time will avoid this penalty.
- Failure to make Estimated Tax Payment penalty: If you didn’t pay enough taxes during the year by withholding taxes from your paycheck or by making estimated tax payments, the IRS may assign you an estimated tax penalty equal to 0.5% balance due for each partial or full month you don’t pay the tax in full and maxes out at 25%.
On average, over 90% of the annual penalties issued by the IRS come from these three penalties. Fortunately, the Internal Revenue Service does provide a process for penalty reduction requests called penalty abatement. The IRS generally does not remove penalties without some formal request made by the taxpayer. As a result, many taxpayers could have gotten some form of penalty abatement but never applied for it and ended up unnecessarily paying them.
Depending upon the type of penalty and the surrounding situation will determine what courses of action are appropriate to apply for some form of penalty abatement. The IRS often will remove penalties if you have reasonable cause for incurring the penalties, if you are a first-time offender, or if your penalty resulted from taking incorrect advice from an IRS representative.
Penalty abatement only occurs after you persuade the IRS to do so. Many taxpayers are not aware of this. Therefore, understanding the rules surrounding penalty abatement eligibility and the application procedures is essential. Obtaining professional tax help from someone with extensive experience helping others with penalty abatement requests may be prudent. For this help, contact Harmon Tax Resolution, LLC for a free consultation today. In the interim, please read on for more information regarding penalty abatement and how to address IRS penalties.
What Is an IRS Penalty Abatement?
IRS penalty abatement occurs when the IRS concurs with your request to have penalties removed. Most IRS penalties assessed can be abated, provided specific criteria have been met. How to pursue abatement varies based on the penalty type and reason it incurred. IRS abatements are also called IRS penalty relief or IRS penalty waiver.
Which IRS Penalties Are Eligible for Abatement?
The IRS offers abatement opportunities for many of its penalties. Fortunately, this includes the most frequently IRS-issued penalty types previously listed, such as the Failure to File penalty and the Failure to Pay penalty. In addition, the Failure to Deposit (FTD) penalty, which occurs when employers don’t deposit their payroll taxes on time, is also included. The FTD penalty accrues faster: 2% of the unpaid deposit for payments 1 to 5 days late. 5% for tax payments that are 6-15 days late. 10% for deposits over 15 days late or made within ten days of receiving the first IRS notice requesting a tax payment.
For these three types of penalties, you can request penalty relief no matter how much the penalty is for. Your ability to request penalty relief is very limited for other tax evasion or fraud penalties. In addition, Trust Fund Recovery Penalties are not abatable; however, if you can establish that you are not a responsible party for this, you may be able to appeal it.
How Are IRS Penalty Amounts Determined?
IRS penalties are solely based on the amount of your tax liability. The penalty amount is computed by applying a particular penalty’s statutory percentage rate to the amount of the tax that you didn’t pay, report, or deposit. For example, if you late filed your tax return where you had a tax balance due of $1,000.00 on May 20th of the same year, which was due on April 15th, you would have a Failure to File penalty totaling 10% of the amount due totaling $100.00.
Does the IRS Apply Interest on Tax Penalties?
IRS charges interest on the amount of the tax balance owed, which includes penalties incurred. The IRS charges interest from the date the balance becomes due. A penalty occurrence will add to the balance due, and interest in that increase begins at the time of inclusion. In addition, the IRS compounds interest, meaning the additional interest will then be subject to having interest computed. Tax debts can get out of hand quickly if action is not taken, especially considering the recent interest rate increases. Under the Internal Revenue Code, the interest rate is determined every quarter. For individuals, the IRS interest rate is determined by the Federal short-term rate plus 3%.
However, if successfully abate a penalty, the IRS will also remove the interest affiliated with that penalty. Getting a penalty abated has added benefits. However, this type of interest removal does not ordinarily apply to other components of your tax debt unless there are changes in your tax assessments or errant interest calculations.
An IRS Tax Attorney-CPA-EA can assist in determining the specific documentation required to abate tax penalties entirely or partially.
What Is the IRS First-Time Penalty Abatement?
The IRS First-Time Penalty Abatement is where the IRS waives a specific penalty because it is the first time you have had such an infraction. In this instance, no explanation is required; you only must inform the IRS that this is your first penalty. If you meet some IRS compliance requirements, the IRS will abate the penalty under this position. The IRS classifies this type of abatement as an administrative penalty waiver.
What Are the IRS Compliance Reporting Requirements and Payment Obligations Needed for First-Time Penalty Abatement?
To be considered for IRS First Time Penalty Abatement, you must be compliant with IRS reporting and payment obligations, which are:
- TIMELY FILING FOR PRIOR 3 YEARS: For the last three years, you have timely filed the type of return the penalty stems from.
- For example, if you seek penalty relief from a recently filed 2022 income tax return, you must have timely filed your 2019, 2020, and 2021 tax returns.
- If this pertains to a payroll return, but you were not in business during the last three years before the return on which the abatement request is being made, if you have maintained timely filings for the available time leading up to this, you will be okay since you were not required to file during the time your business did not exist.
- NO PENALTIES INCURRED FOR THREE YEARS PRIOR. You did not incur any penalties for the three years before the year the penalty was incurred. There is an exception to this rule: if you had a different type of penalty removed, you would still be eligible.
- CURRENT ON ALL TAX FILINGS. You have made all required current tax return filings or are currently on an extension to file.
- For example, suppose you are seeking a First Time Abatement relief from a penalty relating to a 2020 tax return. In that case, you must make sure that the current year’s tax return has been timely filed or, if not filed yet, you have filed for an extension, and the extension time has not expired.
- PAID PRIOR TAXES DUE OR ARE CURRENT ON IRS PAYMENT PLAN. If you have a prior tax balance owed, you may still obtain a penalty abatement if you either pay the taxes due or have made a payment arrangement with the IRS.
You may be able to obtain an IRS abatement while still owing the underlying tax; however, it may be prudent to pay the balance owed to avoid having additional penalties tacked on.
How Do You Request IRS First-Time Penalty Abatement Relief?
There are several ways you can request IRS First-Time Penalty Abatement Relief:
- Call the number listed on your IRS notice. State you are seeking First-Time Penalty Abatement Relief
- Complete and submit IRS form 843 – Claim for Refund and Request for First-Time Abatement. You must list the tax period, type of return, and type of tax. You will also provide information about the penalties you are requesting abatement towards. You can note you are requesting an abatement because this was the first time you incurred these penalties.
IRS Penalty Relief Based on Reasonable Cause
The IRS only grants penalty relief under Reasonable Cause when you have established that you had had a plausible reason for either late paying the tax or late filing the tax return. Typically, the IRS may consider granting relief if it could be shown that the delay of late filing or late payment resulted from events impacting you which were beyond your control, all the while you used prudence and ordinary care to address either the filing or paying your taxes. Negligence or recklessness are not valid reasons for this type of relief.
Reasonable Cause tax abatement can be applied for:
- Late Filing Penalties
- Late Payment Penalties
- Late Deposit Penalties
- Accuracy-related Penalties – in some cases
Below is a non-inclusive list of some potentially plausible reasons the IRS may accept for penalty abatement under the basis of Reasonable Cause:
- You could not pay or file timely because of an act of nature such as wildfires, earthquakes, floods, hurricanes, tornados, or federally declared disasters. There could be other reasons that fall in line with this.
- You were prevented from acquiring the necessary records for proper tax return preparation for reasons beyond your control.
- You could not make timely deposits, or processing failed due to systems being down.
- You were impeded from being unable to timely file tax returns, pay taxes, or make deposits due death of an immediate family member, or you or your family were impaired due to a severe illness.
- You encounter other legitimate reasons that were out of your control, resulting in you missing timely tax filing or paying taxes owed.
To correctly complete your Reasonable Cause request, you must write your reasoning precisely and concisely on the application. Obtaining tax professional help may be prudent.
Typically, the IRS will not approve a Reasonable Cause request due to one of these situations:
- Since you are ultimately responsible for your tax filings and payments, missing filings or payments due to tax preparers will not be accepted.
- Misinterpreting tax laws is not a valid reason for lack of payment or late filing.
- 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 could not afford to pay the taxes due. While this may not be valid for Reasonable Cause, you may be eligible for other IRS debt resolutions, such as Payment Plans, Currently Not Collectible status, or even Offer in Compromise.
It may be prudent to discuss your situation with a professional tax attorney-CPA who can help establish whether you have a good reasonable cause to present to the IRS for penalty abatement consideration or whether another option should be considered.
How to Make an IRS Reasonable Cause Penalty Abatement Request
You request by filing Form 843 – Claim for Refund and Request for Abatement. Make sure to check the appropriate listing under section 5a on the form. Section 7 provides a space to list the facts and surrounding circumstances. You can attach additional sheets if more space is needed for your narrative and provide other supporting documentation. For narrative purposes, concisely and briefly describe all pertinent information to support your reasonable cause position. The IRS representative needs to understand your position well and clearly. Establishing Reasonable Cause is an area a tax attorney-CPA could provide proper guidance on.
Here are some of the factors the IRS considers to establish whether reasonable exists:
- When and what occurred.
- What facts and circumstances prevented you from paying the tax or filing the return on time.
- How the circumstances influenced your ability to pay or file your tax return.
- What was your response to the situation, along with how long it took you to respond once you became aware of it.
- When dealing with a corporation, trust, or estate, the IRS also looks to establish who had the authority to make the tax deposits or carry out the tax return.
It’s imperative to provide as much 3rd party documentary evidence as possible to establish proof of your Reasonable Cause contention. Here are some examples of 3rd party documentary evidence:
- Hospital Records
- Police Records
- Court Records
- National Disaster Documentation
- Physician documentation of the illness, how it impacted you, and the timeframe.
- Death Certificate
- Insurance records
Whether you are faxing or mailing in your Form 843 application, be sure to include any documentary evidence with it.
Must I Use IRS Form 843 to Apply for Either Reasonable Cause or First Time Penalty Abatement Requests?
You can write an abatement request letter instead of filing form 843. Sometimes, a letter may be easier to frame your position than using a form. If you elect to use a letter, be sure to include the following:
- Your name, as listed on the tax return, and tax Identification number.
- The tax form is associated with the penalty and applicable tax period.
- The IRS Notice Number and date if you’ve received a notice.
- What relief type you are seeking (Reasonable Cause or First-Time Penalty Abatement).
This information must be put near the top of the letter immediately, followed by listing your penalty abatement requests sought. You have supporting information listed for each request. Although not required, it’s even helpful if you list the applicable IRS Tax Code or Statute relevant to each relief compliance requirement. Finally, be sure to sign your name on the request letter.
Hiring a tax attorney-CPA may help ensure you have included the correct details and proper support for your request.
How Do You Address Penalties Incurred Due to Incorrect IRS Direction?
Even though this occurs infrequently, you are still entitled to IRS penalty relief through what is known as Statutory Exceptions. A Statutory Exception can be sought when the IRS provides the taxpayer with some written advice to follow, which results in a penalty to incur. To be successful with this type of request, you must adequately document the incorrect advice and show how this caused the consequences. An example would be if an IRS representative instructed you to file a return later than it was due, which caused you to incur a late filing penalty.
To resolve this situation, you can go directly to the IRS and provide them with a trail of the IRS communications which caused you to act incorrectly. You can use Form 843 or draft a letter. You must make sure to:
- Provide proof that you sought advice from the IRS.
- Submit a copy of the actual written errant advice by the IRS.
- Provide support showing how the tax adjustments/directives caused the penalties or increases in tax.
Anytime you have correspondence with the IRS, record and save it for future use, if needed.
Get Trusted Professional Tax Help with IRS Penalty Abatement – Make the Call
To ensure you get the best possible IRS penalty relief outcome, have an experienced tax attorney-CPA expert make it happen. Call today (772-418-0949), or complete an online inquiry form for a free consultation with experienced IRS Penalty Abatement Tax Attorney-CPA-EA, Will Harmon of Harmon Tax Resolution, LLC. He will handle your IRS Penalty issue so you can return to doing what matters most.
For additional information, please see the following blog articles:
- “ What is an IRS Penalty Abatement?”
- “What Are IRS Tax Resolution Services?“
- “When Should You Hire a Tax Lawyer?“
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Make the Call Today So That You Steer Your Path Tomorrow!
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