In our last blog installment, we had an overview discussion on IRS Tax Penalties including a brief overview of Tax Penalty Relief. If you’re like most clients who come into my Richardson TX office with Tax Penalties, they feel that the IRS should just remove their tax penalties. As discussed, the IRS does not simply remove penalties upon request. It is the government’s position that penalties serve as a valuable tool in compliance. However, in certain situations that is possible. Today, we’ll dig into those alternatives a little further.
First Time Penalty Abatement –
If the taxpayer qualifies, this is typically the easiest way to remove a penalty. The First Time Penalty Abatement (FTA) is available for 3 penalties –
- Failure to File
- Failure to Pay
- Failure to Deposit (Payroll Deposits)
The IRS Website states that you may qualify for relief from penalties if the following are true –
- You didn’t previously have to file a return, or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
- You filed all currently required returns or filed an extension of time to file.
- You have paid, or arranged to pay, any tax due.
To request the penalty relief, the taxpayer can call 1-800-829-1040 or the new IRS Penalty Assistance line at 1-855-223-4017 X-225. It is possible that the IRS may request that you make the abatement request by letter if a certain amount is exceeded.
Reasonable Cause –
To qualify for a reasonable cause exception, the taxpayer must be able to show that they attempted comply with the IRS compliance issue, but were unable, due to reasons beyond their control. Some common examples of reasonable cause that the IRS’s website lists include -
- Fire, casualty, natural disaster or other disturbances
- Inability to obtain records
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
- Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.
The important factor is to be able to prove that reason for non-compliance was beyond the taxpayer’s control. In most cases, you will be required to provide documentation that supports your claim.
To request relief, call the 1-800-829-1040 or the number on your notice. The IRS may request you to mail or fax written statements related to the claim.
Appeal of Disallowance of the Penalty Abatement Request
If the IRS does not accept your request for either an FTA, or more commonly, for a reasonable cause penalty abatement, and you believe the denial was in error, appeal the decision. Particularly related to reasonable cause denials, the IRS phone representatives sometimes deny in error. You can request once you receive your Notice of Disallowance from the IRS either on writing or using the IRS’s online tool.
If you are in audit, audit appeals may also provide an opportunity to negotiate the removal of penalties. For example, if a taxpayer is audited for a Hobby Loss and the taxpayer acted in good faith that they believed they had a business and deducted actual expenses paid, if the taxpayer agrees to pay the taxes, it is possible that the IRS appeals officer may waive the penalties as part of the negotiation.
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