What exactly is a Penalty Abatement?
If you wish to move forward with penalty abatement, you must go through all of the proper steps to get any tax penalties removed. Let’s say the IRS penalized you for not paying or failing to file. The next step is to request an abatement to remove the penalty. The IRS has an automated computer system that will assess the penalties in question when you file your return too late or pay on your balance.
Various tax penalties are typically assessed during an IRS audit or investigation, including accuracy and fraud penalties. Once your penalties have been assessed, you may request a penalty abatement.
There are three main methods to secure tax penalty abatements: first-time abatements or administrative waivers, Form 843 abatements, and reasonable cause abatements.
#1 – First time Penalty Abatement and Administrative Waiver
Suppose this is your first time to request penalty abatement, and you meet the statutory requirements. In that case, the IRS may give you administrative relief for a specific penalty, such as failure to deposit penalties, failing to pay, or failure to file. There may be a particular program for you if it is your first time facing one of the various penalties on a return, known as the first-time abate program. Keep in mind, you will need to meet the below eligibility requirements to receive a first-time abatement or administrative waiver:
- You have set up payment arrangements on taxes currently due or have already paid them in full.
- You have filed all necessary extensions or required returns that are due.
#2 – What is a Reasonable Cause Penalty Abatement?
Being deemed ineligible for a first-time abatement program means you may have a justifiable reason you should receive the granted relief, and you may seek an abatement of the penalty for a reasonable cause.
You must have a specific reasonable cause for abatement or waiver if you plan to apply for a reasonable cause penalty abatement.
There are specific guidelines that apply for abatements that are allowed for a reasonable cause. According to the IRS, a reasonable cause penalty abatement is usually only allowed if you utilized prudence and ordinary care when deciding what the tax obligations you had were. It’s essential that you were not acting deliberately in non-compliance and/or willful neglect; you need to ensure you acted in good faith.
You typically could have a reasonable cause for penalty abatement if your conduct remained in good faith to show you deserve a penalty abatement. Every individual case is reviewed by the evidence, facts, and circumstances you present to the IRS. Additionally, they also look at the attempts you put forth to follow the tax law after the circumstances have changed.
Reasonable cause penalty abatements will not always be available for each type of tax penalty. Let’s say you failed to pay your taxes, you did not follow through with the obligations, or you did not file; you likely will not be granted a reasonable cause abatement.
The IRS will want a justifiable cause prior to agreeing on your abatement of tax penalties. The IRS manual lists numerous circumstances that can be used when you challenge your tax penalty. It is possible to win your case with a reason not listed in the manual, but it will likely be a bit more complicated.
Following through with business care and ordinary prudence
To apply this circumstance, you will need to prove that you made a reasonable effort to follow the tax law but couldn’t because of uncontrollable circumstances. Next, the IRS will weigh the four factors below when they determine if they should grant a reasonable cause penalty abatement:
- The reason you gave for abating your tax penalty needs to be something that was clearly beyond your control.
- You need to have taken a considerable amount of time to show you were tax-compliant despite your circumstances.
- How you complied in the past with taxes will be considered.
- The reason for requesting a penalty abatement needs to be convincing.
- The IRS will expect any documentation to prove you can validate your claim.
Serious illness, unavoidable absence, or death
Suppose you went through a severe illness, death in the family, or unavoidable absence that was the reason you were unable to comply with taxes. In that case, you could have a better chance of getting approval for a reasonable cause penalty abatement. However, you need to send in proof of the below things to the IRS:
- Reasons for unavoidable absence and any dates involved
- The date of your loved one’s death
- Proof of the relationship between you and the deceased individual if a death in the family caused your non-compliance
- Your condition’s severity if you suffered a severe illness
Natural disaster, flood, fire, or casualty
Paying or filing your taxes in the event of a natural disaster such as a flood, fire, or tornado, may result in a penalty abatement based on a reasonable cause. Keep in mind, this can be true if you lived in a designated disaster area during the time you were unable to comply. Despite the natural disaster, the IRS will still review your circumstances so they can decide on whether to grant you the relief, and you will need to process any payments you owe promptly.
Unable to retrieve records
In some cases, not being able to file a tax return before the deadline if you were unable to obtain your relevant records may result in an abatement of your tax penalty. Next, the IRS determines if the reason you failed to get your records was justifiable due to your circumstances.
One thing the IRS looks positively at is return accuracy. This means that if you were waiting to get all the documents necessary to file a return accurately, that could demonstrate diligence. However, you will need to make sure you made an effort to secure those missing records.
If you received a penalty due to a mistake you made with a return, you should be able to seek a reasonable cause penalty abatement. Keep in mind, making mistakes could mean you may not have followed with care and ordinary prudence. The below factors will be considered by the IRS when they decide if they should grant you the relief:
- When you realized your mistake
- If you took action to fix a mistake
- If you took the steps necessary to timely fix your mistake
- Whether you had a professional or someone else file your taxes, along with the relationship between the both of you
- Supporting documents
Note: It is a bit difficult to achieve penalty abatement solely on mistakes.
One factor that the IRS has on the list as a reason for tax penalty abatement is undue hardship. If you want to claim undue hardship, there needs to be documentation proving that you were or are still faced with significant financial hardship. Being unable to pay what is owed is not good enough. The IRS also considers these types of situations for undue hardship:
- This penalty will cause you to be in a bad place to care for your minor children.
- This penalty will result in you losing your house
- This penalty will result in you not being able to pay your medical bills and cause severe detriment to your health
Undue hardship can apply to failing to pay penalties; however, the IRS won’t typically waive a penalty because of undue hardship due to failing to file penalties.
#3 – Form 843 for Abatements
Form 843 allows you to file the request asking for an abatement of interest or penalties made by mistake or error by the IRS.
The form needs to be filed by two years or under following the date you paid those specific taxes and no more than three years following the date you filed the tax return.
Additionally, you need to file a separate Form 843 for each wrongly assessed fee for each year. You can use the form to request a tax refund that the IRS assessed in error.
Form 843 can be used to abate several situations, such as the following:
- Interest and IRS penalty that resulted from IRS mistakes or delays.
- Erroneously assessed estate or gift taxes.
- Social Security and Medicare taxes that were erroneously withheld.
- Penalties from mistakenly or wrongly written advice by the IRS
The primary reason most taxpayers file Form 843 is when the IRS assesses taxes wrong, and they don’t owe, in combination with interest and penalties. In the event this happened to you, file Form 843 and ask the IRS to fix the mistakes and abate the interest, penalties, and associated tax.
You may also file Form 843 if your employer withheld too much Medicare and Social Security taxes and refuses to fix the mistake.
To file Form 843, you need basic information such as your name, address, social security number, type of return filed, and the relevant tax period. Additionally, write down the Internal Revenue Code section number related to the penalty that you are seeking an abatement for, which is typically on the fourth line.
The form will ask you to choose from one of the following reasons you are filing a request:
- You have a reasonable cause other than being given the wrong advice by the IRS.
- You received wrongly written information from the IRS.
- The delays errors from the IRS caused the assessment of internist or penalties.
If you feel you need excess space to explain your request, you can attach more pages. Be sure to include any documentation to support the reasons you list.
Tax penalties can significantly raise the amount you owe to the IRS. It may be possible to receive a tax penalty abatement, depending on your situation, to get some relief on the amount you owe. If any of the prior reasons match your situation, and you can show the evidence and documents to support your claims, you could be eligible to receive penalty relief. Enhance your chance of securing an IRS reasonable cause or first-time penalty abatement by talking to a knowledgeable tax law attorney.