In most cases involving a tax debt, interest and penalties accrue and become a very significant portion of the total amount due.
In an IRS penalty abatement case, our attorneys will work hard so that tax debt can be either eliminated altogether or adjusted to something much more reasonable. Penalty abatement does not eliminate tax debt, however.
If you owe back taxes on an un-filed tax return or on unmentioned income, the IRS will continue to demand that you pay back your principal debt. In addition to your principal debt, the IRS will levy penalties that either result in a flat amount, or an added percentage of your current total tax debt. Furthermore, as you pay off your tax debt, the IRS will calculate an interest rate based on quarterly changes. Penalty abatement is an option open to some taxpayers who qualify for relief, allowing them to avoid penalties and interest – but the principal debt will remain.
This tax relief option can be one of the most significant savings vehicles for a taxpayer when it comes to resolving IRS tax debt. Proper attorney representation with the IRS typically leads to a very favorable outcome.
What is Penalty Abatement?
In certain situations, the IRS will agree to forgive tax penalties resulting from late filing of a tax return, tax deposit or other tax payment, this is called penalty abatement. There are a few different types of penalty abatement currently approved by the IRS. Seeking penalty relief is a good idea if you wish to minimize the amount you owe, but each method has its own stringent requirements. Here are your basic options:
- First Time Penalty Abatement
- Reasonable Cause Penalty Relief
- Statutory Exception Penalty Relief
To qualify for abatement a taxpayer must meet certain criteria and possess an acceptable reason for failing to pay their taxes or paying their taxes late. The taxpayer must convince the IRS that their situation qualifies for penalty abatement in order to benefit from this provision. The qualifications according to current guidelines include:
- Reliance on a tax professional
- Ignorance of tax law
- Compliance with current tax requirements
- Medical illness (personal or a family member)
- Natural disasters
- Significant financial hardship
- Death in the family
What Penalties Does the IRS Apply?
The IRS does not allow all penalties to be removed equally. Some penalty relief options only apply to select penalties, while others are more inclusive.
For example, the IRS allows penalty relief of all kinds if you qualify for penalty relief due to reasonable cause. But if you are seeking first-time penalty abatement, or an administrative waiver, the IRS may only allow you to write off penalties applied to late payments, late tax returns, and late tax deposits.
In general, the IRS’ most common penalties include the:
- Failure to File Penalty
- Failure to Pay Penalty
- Failure to Deposit Penalty
These make up most taxpayer penalties and will determine the bulk of what you owe in addition to your principal debt. These are also the only penalties you can seek to get rid of via first-time penalty abatement. However, the IRS also levies financial penalties for several other reasons, including:
- Penalties for filing incorrect information returns.
- Penalties for bouncing a check to the IRS.
- Penalties for accuracy-related problems on your tax return.
- Penalties for an erroneous refund claim.
It’s important to discuss your penalty abatement options with a tax professional before you decide to pursue any of them.
Reasonable Cause Penalty Relief
Reasonable cause is determined by the IRS on a case-by-case basis. These cases are usually characterized by situations where a taxpayer exercised care and prudence to deal with their taxpayer obligations but failed for reasons that were outside of their control. You will need to argue your case in your request. A few common reasons why the IRS might waive a penalty due to a reasonable cause include:
- A natural disaster
- Loss of records through no fault of your own
- Death or serious illness in the immediate family
- System issues outside of your control that may have delayed payment or filing
Statutory Exception Penalty Relief
Whereas reasonable cause helps taxpayers who were the victims of an unjust universe, statutory exceptions are made in special cases.
For example, if the IRS provided the wrong information, mixed up the dates, or gave a taxpayer incorrect advice, their penalty may be forgiven.
Furthermore, the IRS may issue penalty abatement through a statutory exception if the taxpayer could not pay their taxes on time or file a return due to being in an active combat area, a federal disaster area, or if a return was mailed on time, but had not arrived in an IRS office yet.
First-Time Penalty Abatement
If you’ve paid and filed your taxes on time for the past three years but owe back taxes, the IRS will usually give you a break. First-time non-compliant taxpayers can request First Time Penalty Abatement (FTA). This request applies to some kinds of penalties in a single tax period and could end up saving taxpayers considerable money. However, if you don’t have a clean record of paying your taxes on time for at least three consecutive years prior to the back taxes, you will not qualify for this type of IRS penalty abatement.
In other words, first-time penalty abatement is somewhat of a misnomer. The IRS does not care if you owed taxes in 1988, provided you haven’t owed taxes in recent memory. You can apply for first-time penalty abatement if your record has remained spotless in the last three years, and you remain eligible for the other requirements the IRS has for past and current compliance.
Something important to note is that you can apply for penalty abatement at any point during your tax debt, including before you start making payments.
However, this is generally a bad idea. If you get rid of your accumulated penalties and interest, and then start paying off your tax debt, you may still be held accountable for the interest accumulated while your tax debt was still being paid off. Furthermore, you may still accrue additional penalties while you are still making tax payments.
For example, even if you are in the process of paying off your federal tax debt, the IRS may continue to apply a Failure to Pay penalty onto your outstanding debt. Because you have already applied for first-time penalty abatement in this scenario, and it has been less than three years, the IRS will not allow you to write off your penalties again.
If you, however, decide to wait on applying for penalty abatement until after you have completely paid off your debts, or are well though paying off your remaining tax debt, the IRS may approve of your penalty abatement and pay back what you’ve already paid off in penalties and interest, or write off the remainder of your debt if it is covered by the amount you have accrued in penalties and interest.
It’s in your best interest to discuss these options with a knowledgeable tax professional before you continue. Applying for a penalty abatement program as soon as you possibly can could be a mistake if you still have a substantial tax debt left to pay off.
How Do I File for Abatement?
Before filing for abatement, you’ll need to be sure you qualify and are able to communicate a convincing argument to the IRS. The experts at Rush Tax Resolution. understand what types of situations will qualify a taxpayer for penalty abatement and can help you file the necessary paperwork.
Once you have thoroughly gone through each of your options with a tax professional, you will need to fill out the appropriate form. These are usually Form 843, a Claim for Refund and Request for Abatement. Again, if you’ve paid off most or all your tax debt, you can request a refund of your paid penalties and interest, rather than seeking to remove penalties currently applicable to an ongoing debt.
To learn more about penalty abatement and your options for tax resolution and tax debt relief, don’t hesitate to give us a call or send us a quick message.
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