Penalties are one of the most common tools the IRS uses to keep taxpayers compliant and in good standing. Every year, millions of taxpayers are hit with IRS penalties for various reasons; sometimes it’s for simply missing a deadline, other times, it’s for something more serious. Penalties may start small, but they quickly compound, often turning a manageable tax bill into an overwhelming debt. Fortunately, the IRS offers something called Penalty Abatement.
A penalty abatement is a type of relief granted by the IRS that waives penalties associated with your tax debt, provided you meet the eligibility criteria and your penalty is eligible for penalty relief. Whatever the reason you may have been penalized for, penalty abatement may be the relief you didn’t know you needed.
Drowning in tax debt? Don’t face the IRS alone. Our team at Victory Tax Lawyers will fight to reduce your penalties and get you relief. Schedule a free consultation with one of our Penalty Abatement experts today to get started!
In this article, we’ll break down what IRS penalty abatement is, who qualifies, how to apply, and why acting fast matters.
What Is an IRS Penalty Abatement?
At its most basic, a penalty abatement is a form of waiver or relief granted to taxpayers who have received penalties for not complying with their tax payments. When your penalties are abated, the IRS removes either part or all of the penalties that have been assessed against you.
While the Internal Revenue Code recognizes over 150 different penalties, the most common penalties arise as a result of late filing, failure to pay, failure to deposit, and accuracy-related issues.
Note that penalty abatements only take care of penalties and nothing more. This means that even if your penalties are waived, you’ll still have to pay your accumulated back taxes and interest. However, removing the penalties can significantly reduce your overall tax burden and potentially make it easier for you to catch up without added pressure.
Understanding the right moment and method to request penalty relief will save you money and decrease your tax debt stress.
IRS Penalties Eligible for Abatement
As we mentioned earlier, the IRS imposes a variety of penalties to get taxpayers to stay on the path of compliance. Luckily, taxpayers may be able to secure approval for abatement under certain conditions. Here are the most common types of penalties that qualify for penalty relief:
1. Failure to File Penalty
This penalty is charged when your tax returns are filed late, i.e, after the annual or quarterly deadline. It applies to both individual and partnership returns. It’s usually 5% of the unpaid taxes for each month (or part of a month) that your return is late, up to a maximum of 25%.
2. Failure to Pay Penalty
This is another relatively common fine. It applies to taxpayers who fail to pay their taxes as due, even if they have filed on time. The failure-to-pay penalty continues to accrue as long as your taxes remain unpaid. It starts at 0.5% of the unpaid amount per month, and can build up to a maximum of 25% of the unpaid tax. If your debt is still unpaid 10 days after the IRS has issued you a notice of intent to levy, the rate increases to 1%.
3. Failure to Deposit Penalty
If businesses don’t pay their payroll taxes (Medicare, social security, unemployment and federal income tax withholding) on time or have filed them incorrectly, they can face a Failure to Deposit penalty.
The severity of this penalty largely depends on how late the deposit is and the amount owed. If the delay is 5 days or less, the penalty rate is charged at 2% of the unpaid deposit. A delay of 5 to 15 days increases the rate to 5%. While delays of over 15 days are charged at 10% of your unpaid balance. Since employment taxes are considered trust fund taxes, the IRS considers such omissions as particularly serious. Nonetheless, you may still qualify for abatement if you’re able to demonstrate reasonable cause.
4. Accuracy-Related Penalty
As the name suggests, this penalty is charged when the IRS believes that your taxes are substantially understated, misstated, or that you’ve been negligent in preparing your return. It is typically 20% of the underpayment resulting from the error. As with other penalties, the IRS may consider you for an abatement if you’re able to show the errors didn’t occur as a result of willful neglect
5. Other Penalties Eligible for Relief
Some other penalties that you can receive relief for include:
- Trust Fund Recovery Penalty: This penalty is typically levied on individuals who intentionally fail to collect or pay their trust fund taxes.
- Underpayment of Estimated Tax Penalty: If you don’t pay enough tax throughout the year, whether through withholding or estimated payments, you may incur this penalty. First-time offenders are always granted preferential treatment when the question of relief or abatement arises, and the same applies to this particular penalty.
- Dishonoured Cheque: This penalty applies when a taxpayer lacks the necessary funds to cover their tax payments. Consequently, their bank would dishonour and bounce their check or electronic payment, leaving the taxes unpaid. The IRS would typically send a notice or letter saying that a dishonored check penalty has been assessed.
Types of Penalty Relief
The IRS offers several forms of penalty relief to taxpayers who meet the eligibility criteria. Depending on the taxpayer’s situation and the penalty assessed, one of the following three types of relief may be available to them:
1. Administrative Waiver
The administrative waiver is perhaps the most straightforward form of penalty relief available, as it requires little to no paperwork. While different administrative waivers exist, the most well-known is the First-Time Penalty Abatement (FTA), also commonly referred to as the “get-out-of-jail-free card.”
FTA is granted to taxpayers who have an otherwise clean compliance history but have made a one-time error. This relief can be used to remove penalties related to Failure to File, Failure to Deposit, and Failure to Pay, provided they meet the requirements and can demonstrate they’re first-time offenders.
Do You Qualify for IRS Penalty Abatement?
Here are metrics you can check to see if you qualify for the FTA administrative waiver:
- Clean Compliance History: Maintaining a solid compliance history with the IRS is the most important. This means you must have filed all tax returns and mustn’t have had prior penalties (other than estimated tax penalties) for the past three years. If you have incurred any penalties, you will be disqualified from the abatement unless you have received reasonable cause relief in the past. In that case, you may still qualify for abatement.
- Payment Compliance: To meet this requirement, you must either be current with your tax payments, have paid off your balance in full, or have a valid installment agreement in place with the IRS.
- Filing Compliance: All required returns must be filed. If you have outstanding tax returns or have incurred late-filing penalties due to unfiled forms, you likely won’t qualify until you’ve fully paid or can prove you filed for an extension.
Individuals, businesses, and certain pass-through entities can request an FTA by phone or by mail, provided they meet the above requirements. If requesting by phone, taxpayers simply need to call the toll-free number as seen on their IRS notice. For requests submitted by mail, filing Form 843, Claim for Refund and Request for Abatement, is sufficient to get the job done.
Alternatively, your tax professional can act as a stand-in, helping you contact and manage all subsequent conversations with the IRS. Regardless of the penalty amount, in many cases, if you’re eligible, the IRS will automatically approve your first-time abatement request without much back and forth. If you don’t qualify for First-Time Abate, you may still be eligible for reasonable cause relief.
2. Reasonable Cause
As we’ve tried establishing, penalties may be removed if you can prove that there was a valid reason, in essence, a reasonable cause behind the failure. This form of penalty abatement is based on the idea that you exercised ordinary business care and prudence but were still unable to meet your tax obligations due to unforeseen or uncontrollable circumstances.
Many taxpayers lean into this option when requesting an abatement, often claiming that they relied on incorrect advice from their tax professional or software, or that they were ignorant of the law, particularly if there were recent changes in the tax code.
The IRS determines what suffices as reasonable cause on a case-by-case basis. In each situation, the agency considers all relevant facts and circumstances involved and rules in favor or against, with the criteria for relief often depending on the type of penalty and the applicable provisions of the Internal Revenue Code (IRC).
Valid Reasonable Causes to Request Relief from the IRS
In most cases, for reasonable cause to be taken into consideration, the issue has to be completely out of your control. You must also provide proof to the IRS that an attempt to file was made, but it ended up becoming impossible. Some commonly accepted reasons include:
- The passing or serious illness of a family member
- Unavoidable absence, like being in rehab or prison
- Experiencing divorce or other similar traumatic experiences related to family
- Any crucial records were destroyed by fire, flood, or other natural disasters
- A payment could not be made due to civil disturbances
- Received incorrect or untrue directions from a tax professional or attorney
You want to note that simply citing forgetfulness or busyness won’t cut it. You must be able to show that your noncompliance was not due to your decision to willfully neglect your tax obligations and that you really made genuine efforts to comply but somehow were unable to.
If a corporation is involved, the IRS will assess whether the business continued its normal operations during the period of non-compliance. The corporation must provide documentation explaining why compliance wasn’t possible.
In summary, to increase your shot for this relief, you must be able to provide explanations as to why you weren’t able to file or pay on time, you must prove that you acted in good faith, and also show that you took reasonable steps to fix the issue as soon as you discovered it. Documentation is pretty important in all of these. Your claims must be corroborated by documents that prove your argument, such as hospital records, insurance claims, or correspondence with your tax advisor.
It’s generally easier to obtain an administrative waiver than it is to obtain Reasonable Cause Relief. In most cases, most penalty abatement decisions never get to court as they are concluded by administrative determinations. Nonetheless, you may still have a chance under Reasonable Cause if you can prove your case well.
3. Statutory Exception
Though not so common, statutory exceptions are another justification for penalty relief under the tax law. The entire idea behind statutory exceptions is that there are inherent exceptions within the law that are automatically triggered when certain legal criteria are met, regardless of your intent or effort.
Unlike the other two grounds for penalty relief, statutory exceptions do not require the subjective judgment by the IRS. Once you meet the laid-down conditions outlined in the law, you’re automatically entitled to claim full or partial penalty relief. Some of the most recognized statutory exceptions include:
1. Following Wrong Written Guidance from the IRS
If the IRS gave you incorrect written advice and you followed it, you might be able to get relief. You’ll need to show a copy of your request asking for that advice, the incorrect response you received in writing, and evidence that you depended on that response while making your decisions.
2. Timely Mailing of Your Return
If you mailed your return before the deadline but faced a penalty because of a mailing delay, you might qualify for relief under the timely mailing rule (the “mailbox rule”). To do so, you must provide proof showing the postmark was dated on time, sent to the right address, and mailed with the U.S. Postal Service or a designated private delivery service.
3. Residing in a Declared Federal Disaster Area
People living or running businesses in places hit by declared natural disasters are often given extra time to file their taxes and make payments. If you’ve received penalties charged during this time, they can often be canceled.
4. Military Operations in a Combat Zone
Members of the U.S. Armed Forces who serve in a combat zone are usually eligible for extended filing and payment deadlines. If a taxpayer is charged a penalty while serving in these areas, they can request abatement, and usually, their request would be approved.
How To Get IRS Penalties Waived?
We’ve outlined four key steps to follow if you’ve received a notice from the IRS and you believe you qualify for tax penalty abatement:
Step 1 – Identify the Penalty and Check Eligibility
If you’ve received a notice stating the IRS assessed a penalty, the first step is to determine which penalty it has charged you, as it will determine the kind of relief you qualify for. Usually, this information can be found on the IRS notice or letter you received. This step is important because abatement only applies to certain penalties.
Next, check if you meet the criteria for relief. We have already outlined the eligibility requirements for the different types of penalty relief above. For instance, you may be unable to qualify for a First-Time Penalty Abatement if you haven’t demonstrated consistent compliance. Knowing this before applying will help you tailor your case better.
Step 2 – Gather Supporting Documentation
You’ll need strong documentation to support your request. This is why you must have all relevant documents on hand. This may include medical records if you’re claiming health problems prevented you from filing, financial documents demonstrating hardship if you’re claiming you weren’t financially capable, or evidence of errors made by the IRS, depending on your specific situation.
Step 3 – Submit Your Request
The application process largely depends on the specific type of abatement you’re requesting. Some penalty relief requests may be accepted over the phone, while others will have to be concluded in court. For instance, if you’re requesting basic relief, such as the FTA, you can easily put a call across to the IRS directly through their hotline. When calling, make sure you can provide the following information:
- The notice or letter the IRS sent you
- The penalty you want relieved
- The reasons you think the agency should remove it
If the IRS concludes that it cannot approve your relief over the phone, then you should write them. To do so, fill and submit Form 843, Claim for Refund and Request for Abatement. When submitting written requests, make sure you don’t miss out on any detail that is relevant to your case. If your request is denied again, even after writing them, you may still have the option of pursuing an appeal, provided you’re sure that the circumstances that surrounded your tax penalty qualify for you to request relief.
Step 4 – Hire A Professional
Ultimately, interactions with the IRS can involve a significant amount of paperwork and back-and-forth. If you’re not well-versed in the tax law, this may prove overwhelming. It’s why we advise taxpayers to work with a tax professional. Because of their comprehensive understanding of tax law, they can guide you through the process and increase your chances of securing relief.
A tax attorney will represent you before the IRS, oversee your application at each stage, and address any follow-up questions that may arise.
Penalty Abatement Mistakes That Can Cost You
You can sabotage your claims once you make errors during your application. Here are some common mistakes to watch out for:
- Failing to Provide Adequate Documentation: The IRS isn’t going to be moved by your stories, no matter how emotional. They want proof. Whatever your claims are, you should have adequate supporting documents to prove them.
- Missing IRS Deadlines: Abatement isn’t available forever. The longer you drag, the harder it is to prove that your noncompliance wasn’t willful and that you’re someone who ordinarily exercises due care and prudence. Moreover, there is an eligibility timeframe for IRS abatement requests. Requests are time-sensitive, and missing key deadlines, especially when you’re filing Form 843, can disqualify you from relief, even if you meet the eligibility requirement.
- Errors: Errors can include using the wrong forms or even using the right forms but filling out the wrong information. A lot of taxpayers also fail to properly complete the required forms due to ignorance on how to go about it or reliance on misinformation. Incomplete descriptions of reasonable cause or missing key boxes can result in an automatic denial. Hence why you need the guidance of a tax expert.
Need an IRS Penalty Abatement Lawyer for Maximum Relief?
Ignoring what you owe triggers penalties. Penalties don’t just stand alone; they come along with interests, levies, liens, and garnishments. At the end of the day, what started out as a manageable tax debt may spiral into an overwhelming sum. Hence why tax debt should never be left unattended. But sometimes, it’s inevitable. Things outside our control happen, and we’re unable to keep up with our tax obligations.
Luckily, the IRS provides qualifying taxpayers the option of abating certain penalties. If you feel you’ve been unfairly made to pay penalties due to situations beyond your control, our tax lawyers can help you get that resolved.
Our experienced tax professionals at Victory Tax Lawyers are prepared to take on your case, stand in for you throughout the abatement process, and ensure you get tax relief. Even if you do not qualify for abatement, we can help you secure a spot in other IRS forgiveness programs. Reach out for a free attorney consultation or have an in-person visit at our office today to speak with a lawyer and regain peace of mind.
Frequently Asked Questions
1. Can you negotiate with the IRS to remove penalties and interest?
Yes, you can negotiate with the IRS to remove or reduce penalties and interest. If you missed a deadline for a valid reason, you can request penalty abatement to have those penalties removed. If your request is denied, your tax attorney can appeal for you to be given an Offer in Compromise, which lets you settle for less, or an Installment Agreement, which enables you to pay your debt in manageable monthly sums rather than at once.
2. Who qualifies for penalty abatement?
You may qualify for First-Time Penalty Abatement (FTA) if you have a history of timely tax compliance. On the other hand, you may be able to secure reasonable cause relief or statutory exception relief if you can prove that you meet the qualifying requirement of being deterred by circumstances outside your control.
3. What is a 100% tax abatement?
A 100% tax abatement typically means that all penalties (and often associated interest) are completely removed, but it doesn’t eliminate the actual tax liability itself. It’s quite unlikely that you’ll see the IRS wipe out a taxpayer’s tax debt entirely. However, they do provide options to make paying your debt easier to follow through with. For example, in rare cases, usually through an Offer in Compromise, the IRS might agree to forgive a portion of your total debt. This could include penalties, interest, and even part of the original taxes owed.
4. Does the IRS have a one-time forgiveness program?
Yes, this is commonly referred to as the First-Time Penalty Abatement (FTA). If the IRS considers you to be in good standing, you may be eligible for a one-time forgiveness of penalties for failure to file, failure to pay, or failure to deposit. Note that this relief is only available for a single tax period and doesn’t apply if you have interests or multiple years of penalties.
5. What to do if your penalty abatement request is denied?
If your request for penalty abatement is denied, you can choose to appeal and contest the IRS decision. Make sure to prepare a strong appeal that addresses the reasons for denial, and while at it, remember to make available relevant supporting documentation that can help you prove your claim.
