Tax liability can be overwhelming, especially when penalties and interest are tacked onto it. Penalties can significantly increase the tax balance owed to the Internal Revenue Service (IRS). These penalties are the IRS’ way to punish taxpayers for not paying their tax liability on time, as well as to deter taxpayers from getting behind on this debt. These penalties are often automatically added to the debt. However, there may be ways to have these penalties waived or abated.
If you are wondering, “Am I eligible for an IRS tax penalty abatement?” consider contacting Damiens Law for help. A knowledgeable tax lawyer can review the circumstances of your case and work on a strategy to decrease the amount due as much as possible within the confines of the law. You can learn more about this option when you call (601) 957-9672.
Types of IRS penalties
The IRS has more than 150 different penalties. These range from everything from late filing, to return errors, to late payments and noncompliant activity. The three most common penalties are:
- Failure to file penalty – This penalty is assessed when a taxpayer fails to file a tax return when they are required to. The amount of the penalty is 5% per month on the balance due, for a maximum of 25%.
- Failure to pay penalty – This penalty is imposed if a taxpayer does not pay their tax liability when due. It is equal to 0.5% per month of the balance, for a maximum of 25%.
- Failure to make estimated tax penalty – This penalty applies when a self-employed taxpayer fails to pay estimated taxes throughout the year. The amount of the penalty is equal to the interest lost by not having these payments.
- Failure to deposit penalty – The failure to deposit penalty is imposed if a business fails to pay employment taxes on time and is equal to the lost interest.
What is a tax abatement?
Tax abatement is the removal of penalties after they have been assessed. Tax abatement provides relief to taxpayers from these penalties. Because penalties are often assessed automatically, an abatement may be necessary to remove the penalty from the taxpayer’s record.
Different procedures may be involved, depending on the type of penalty. In some cases, penalties cannot be abated. However, there may be other options such as requesting exclusion from the penalty. Penalties proposed during IRS audits or investigations may not be assessed until the taxpayer interacts with auditors or appeals officers. In some instances, it may be necessary to take the IRS to court.
Types of tax abatements
There are various types of tax abatements, including:
To claim a statutory exception, the taxpayer must prove a specific authoritative exclusion to the penalty. These can be explained to the IRS when filing taxes, such as requesting an exclusion for disaster or combat zone relief.
Abatement can also be requested when the taxpayer made an error by relying on IRS advice. A successful granting of this relief requires the taxpayer to have documented evidence of the advice the IRS provided.
The IRS can also provide an administrative waiver in which an existing provision can be used that facilitates effective tax administration. The most common administrative waiver is the First-Time Penalty Abatement Relief, which can be used to abate the failure to file and failure to pay penalties for one tax period.
To be eligible for this relief, the taxpayer must:
- Have filed all returns
- Paid all taxes or be in an installment agreement with the IRS for a balance owed
- Not have a prior history of penalties for the past three years before the penalty was assessed
Taxpayers can request this relief by calling the IRS’ phone number indicated on their notice. Alternatively, a tax lawyer from Damiens Law can request the abatement on your behalf.
Reasonable cause relief
One of the most common types of abatement relief is reasonable cause relief in which the taxpayer shows they used ordinary care and prudence but was unable to comply because of unforeseen circumstances beyond their control. For example, a taxpayer might argue that they relied on tax software or advice from a tax professional. To be successful with this type of argument, the taxpayer will need to present all the relevant facts and arguments for the IRS to make a determination.
Factors the IRS may consider
Some factors the IRS may consider when determining whether to abate penalties that it discusses in its manual include:
- Ordinary business care and prudence
- Serious illness
- Unavoidable absence
- Ignorance of the law
- Inability to obtain records
- Undue hardship
- Errors by the IRS
- Bad advice
Best practices to secure a tax penalty abatement
Taxpayers can take steps to maximize their odds of a successful request for a tax penalty abatement, such as:
Not paying the penalty
If the taxpayer simply pays the penalty, the IRS will have no incentive to provide abatement. Additionally, taxpayers who have an unpaid balance can request a formal Collection Due Process Hearing for an unpaid penalty. These hearings tend to take less time than IRS Service Center penalty abatement appeals hearings.
Making the request in writing
The taxpayer should make their request for abatement in writing. This will help to create a clear record of the request and prove a timely request was made. While an abatement can be requested over the phone for some types of abatements, it cannot work with all types of abatements. Additionally, relying solely on a phone call can make it difficult for the taxpayer to later show they made a formal request.
Taxpayers can complete Form 843, Claim for Refund and Request for Abatement and supply additional documentary evidence to support your claim.
Making the request in a timely manner
Taxpayers should make their abatement request in a timely manner. This is generally three years from the date the return was filed or two years from paying the penalty. Taxpayers who enter into an installment agreement and qualify for First-Time Abatement should make their request within two years after the payment arrangement. Letting this deadline pass can result in an automatic rejection of the request.
Requesting first-time abatement
First-Time Abatement is one of the most common types of abatement requests. Individuals who qualify for this type of abatement can use it even if they do not have grounds for reasonable cause abatement or other types of abatement. There is not a cap on the amount of the penalty that qualifies for this abatement.
Proving prior compliance
Taxpayers may need to show that they have complied with tax requirements for years prior to the year for which they are being assessed the penalty. If there were any previous years where penalties were assessed, the taxpayer may have to explain the reason for these previous penalties. Prior compliance can weigh in the taxpayer’s favor for reasonable cause abatement.
Supporting your position
The taxpayer may have to provide proof to support their position for an abatement request. For example, if they are making a reasonable cause abatement request, they may have to provide information about the facts and circumstances that led to noncompliance, such as medical records that show they were hospitalized at the time. They may also have to provide information about how their life was affected by the reasonable cause, such as the illness also preventing them from working. Specifically, taxpayers should be able to provide a clear chronology of events for when they are alleged to have failed to comply with the relevant tax rules.
Providing supplemental information
Taxpayers should be prepared to provide more information than the minimum required to make a formal request. In addition to providing supplemental information at the time they make their request, taxpayers may also need to provide additional information the IRS requests. If the taxpayer does not receive information about their request, they may need to contact the IRS and refile the request in writing. Taxpayers can also request a collection hold while their abatement request is being analyzed.
Appealing adverse decisions
If the taxpayer’s request for abatement is denied, the taxpayer should not be deterred. Many times, the IRS may make an adverse decision because it fails to consider the taxpayer’s total circumstances. Even if the taxpayer does not qualify for abatement based on one specific criterion, the taxpayer may still be able to qualify for abatement based on the totality of the circumstances and for reasons the IRS may have ignored. The IRS may rely on computer programs that assess these types of requests. By appealing adverse decisions, the taxpayer can have the request reviewed by a human who can evaluate all of the information and make an informed decision based on it.
Contact Damiens Law for help with your tax penalty abatement request
If you are still wondering, “Am I eligible for an IRS tax penalty abatement?” you are not alone. IRS tax penalties and the abatement procedure can be complicated. A knowledgeable tax lawyer from Damiens Law can help.