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How To Qualify For IRS Penalty Abatement Or Penalty Waiver

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IRS Penalty Abatement

Penalty Abatement

Penalty abatement is a relief option provided by the IRS that allows taxpayers to remove or reduce penalties associated with unpaid taxes or failure to file a tax return. These penalties can accumulate quickly, significantly increasing the amount owed to the IRS. The IRS may abate several types of penalties, including those for failing to file a tax return, failing to pay taxes on time, and failing to deposit taxes as required.

To qualify for penalty abatement, you must demonstrate a reasonable cause for your failure to pay taxes or file a tax return. Reasonable causes can include events beyond your control, such as a natural disaster, serious illness, or the death of an immediate family member.

There are three main types of penalty abatement:

  1. First-Time Penalty Abatement (FTA): This relief is available to taxpayers who have not been subject to penalties in the past three tax years and have filed all required returns and paid, or arranged to pay, any tax due.

  2. Reasonable Cause Penalty Abatement: This type of abatement is granted when a taxpayer can show that their failure to comply with tax obligations was due to circumstances beyond their control, such as a natural disaster, serious illness, or death in the family.

  3. Statutory Exception Penalty Abatement: Certain statutory exceptions allow for penalty abatement in specific situations defined by the IRS, such as incorrect written advice from the IRS or other qualifying criteria established by tax laws and regulations.

IRS First Time Penalty Abatement

This is for people who have not been fined for any taxes in the three years before the tax year and want to lower their tax bill. You must also have filed all of your tax returns or asked for an extension, and you must have paid or made plans to pay any taxes that are due.

First Type of Penalty Abatement

Reasonable Cause Penalty Abatement

This provision applies to taxpayers who can demonstrate that they attempted to meet their tax obligations but were unable to do so due to circumstances beyond their control. These circumstances may include events such as death, serious illness, fire, natural disaster, or other extraordinary situations.

Second Type of Penalty Abatement

Statutory Exception Penalty Abatement

This applies if you received incorrect written advice from the IRS. To qualify, you must provide the IRS with a copy of the incorrect written advice you received, as well as the written request for advice.

Third Type of Penalty Abatement

To request penalty abatement, you have several options:

  1. Phone Request: You can call the IRS and request penalty abatement directly over the phone. This method can be convenient and provides immediate feedback on your request.

  2. Written Request: You can write a letter to the IRS explaining your reasons for requesting penalty abatement. In your letter, include details about the penalties assessed, the reasons you believe you qualify for abatement, and any supporting documentation.

  3. IRS Form 843: You can use IRS Form 843, Claim for Refund and Request for Abatement, to formally request abatement. This form allows you to specify the type of penalty you are contesting and provide a detailed explanation and supporting evidence.

Each method has its own advantages, and you can choose the one that best suits your situation. Be sure to provide thorough and accurate information to support your request for the best chance of approval.

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IRS Penalty Abatement

Fortunately, the IRS has created a first-time penalty abatement. This is a little-known administrative waiver that many American taxpayers do not know much about.

If you own a business or are an individual taxpayer, you may receive a penalty on top of what you owe in tax to the IRS. The first time penalty waiver allows compliant taxpayers to request abatement or remove certain penalties.

TheCPATaxProblemSolver, is experienced in penalty abatement.

IRS penalties can be quite substantial, leading to a significant increase in your tax debt when you file or pay taxes late. However, there is some relief available, as the Internal Revenue Service (IRS) is open to removing certain penalties.

payroll tax relief

This relief process is known as penalty abatement. In most cases, the IRS doesn’t automatically remove penalties; instead, you must request their removal. The IRS considers various situations for penalty removal, but it’s generally easier to have penalties waived if you are a first-time offender, have reasonable cause for incurring the penalties, or received incorrect advice from an IRS agent.

To obtain penalty abatement, you need to convince the IRS to eliminate the penalties. It is helpful to have a good understanding of tax laws when applying for penalty relief. Seeking assistance from a tax professional can guide you through the process. I have extensive experience helping clients apply for reasonable cause relief and other forms of penalty abatement. Contact me for assistance with IRS penalties.

What Is Penalty Abatement?

Penalty abatement refers to the IRS agreeing to remove penalties from your account. This relief can apply to almost any penalty assessed by the IRS, and it may be referred to as a penalty waiver or penalty relief. The process for applying for abatement varies based on the type of penalty and the reason behind its occurrence.

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Which Penalties Qualify For Abatement?

You can request abatement for a wide range of IRS penalties, including:

1. Failure to file tax penalty: This penalty applies when you fail to file or file your tax return late.
2. Failure to pay penalty: This penalty is incurred when you file your tax return but fail to pay the owed amount.
3. Failure to deposit penalty: Employers face this penalty if they don't timely deposit their payroll taxes.

Regardless of the penalty amount, you can request relief for any of these penalties. However, relief cannot be requested for penalties related to fraud or tax evasion. Additionally, the trust fund recovery penalty is ineligible for abatement, but you may be able to appeal it if you can demonstrate it shouldn't have been imposed.

These penalties are not fixed amounts but rather a percentage of the tax liability resulting from unreported, unpaid, or undeposited taxes. Therefore, the penalty amount and the relief needed can vary significantly based on the underlying tax obligation.

Interest On Tax Penalties

When the IRS imposes a penalty, it becomes part of your tax debt, and interest accrues on the balance. Interest begins accumulating on the due date of the return, payment, or deposit. The IRS also applies interest on penalties, starting from the date the penalty is added to your account, with compounding interest. This can lead to substantial interest charges. The interest rate varies and is adjusted quarterly in accordance with the Federal interest rate.

The good news is that if you qualify for penalty abatement, the associated interest will also be removed by the IRS. Except for cases where the tax assessment changes or interest was assessed in error, other interest cannot be waived. However, successful penalty abatement can reduce the interest portion of your balance as well.

Step-by-Step Guide to Requesting Penalty Abatement

Requesting penalty abatement from the IRS can be a complex process, but following these steps can help streamline it. Penalty abatement may be granted for various reasons, including reasonable cause, administrative waivers, and statutory exceptions. Below is a comprehensive guide to help navigate this process.

Step 1: Understand the Types of Penalties and Grounds for Abatement

  1. Types of Penalties:

    • Failure to File: Penalizes taxpayers who do not file their tax return by the due date.
    • Failure to Pay: Applies when taxes are not paid by the due date.
    • Failure to Deposit: Imposed for not depositing payroll taxes on time.
    • Accuracy-Related Penalties: For negligence or disregard of rules and regulations, substantial understatement of income tax, etc.

  2. Grounds for Abatement:

    • Reasonable Cause: Demonstrates that the taxpayer exercised ordinary business care and prudence but was unable to comply.
    • Administrative Waivers: Includes First-Time Penalty Abatement (FTA) and other administrative reliefs.
    • Statutory Exceptions: Specific circumstances defined by law.

Step 2: Gather Necessary Documentation

  • Tax Returns and Correspondence: Copies of all relevant tax returns and IRS correspondence.
  • Evidence of Reasonable Cause: Documentation supporting your claim, such as medical records, death certificates, or records of natural disasters.
  • Records of Compliance: Evidence of past compliance if requesting FTA.

Step 3: Determine the Appropriate Abatement Request Method

  1. Request by Phone:

    • Call the IRS at 1-800-829-1040 for individual taxpayers or 1-800-829-4933 for business taxpayers.
    • Be prepared to explain your case and provide supporting information.

  2. Request by Letter:

    • Write a formal letter to the IRS including:
      • Your name, address, and Social Security number or Employer Identification Number.
      • Tax year(s) involved.
      • Specific penalties you seek to abate.
      • Detailed explanation of why you qualify for abatement.
      • Attach copies of supporting documents.

  3. Form 843 – Claim for Refund and Request for Abatement:

    • Complete and submit Form 843.
    • Include a detailed explanation and attach supporting documents.

Step 4: Craft Your Reasonable Cause Argument

  • Common Reasonable Causes:
    • Natural Disasters: Provide records of events and their impact.
    • Serious Illness or Death: Include medical records or death certificates.
    • Inability to Obtain Records: Explain circumstances and efforts made to obtain necessary records.
    • Other Valid Reasons: Any other circumstance demonstrating ordinary business care and prudence.

Step 5: Submit the Request

  • Mail the Request:
    • Send the completed Form 843 or letter to the appropriate IRS address listed in the IRS instructions.
  • Keep Copies:
    • Retain copies of all documents submitted for your records.

Step 6: Follow Up

  • Monitor the Status:
    • Follow up if you do not receive a response within a reasonable time (typically 30-60 days).
    • Be prepared to provide additional information if requested by the IRS.

Step 7: Consider Further Action if Denied

  • Appeal the Decision:
    • If the request is denied, you can appeal the decision through the IRS Office of Appeals.
  • Seek Professional Assistance:
    • Consider consulting a tax professional, such as a CPA or tax attorney, for assistance with the appeal.

Examples and Potential Pitfalls

Example 1: Reasonable Cause Due to Natural Disaster

Scenario: A taxpayer was unable to file their return on time due to a hurricane that caused significant damage to their home and disrupted their normal living conditions. Steps Taken:

  1. Gathered evidence of the hurricane’s impact (e.g., insurance claims, photographs).
  2. Prepared a detailed explanation and attached supporting documents.
  3. Submitted Form 843 to the IRS with the reasonable cause argument.

Example 2: First-Time Penalty Abatement (FTA)

Scenario: A taxpayer with a clean compliance history for the past three years failed to file on time for the first time. Steps Taken:

  1. Confirmed eligibility by reviewing past compliance.
  2. Called the IRS and requested FTA over the phone.
  3. Provided the necessary information and received confirmation of penalty abatement.

Potential Pitfalls

  1. Insufficient Documentation: Failing to provide adequate supporting documents can lead to denial.
  2. Incomplete Forms: Missing information or incorrect details on Form 843 can delay processing.
  3. Misunderstanding Eligibility: Not understanding the criteria for FTA or reasonable cause can result in wasted efforts.
  4. Not Following Up: Assuming the IRS will respond promptly without follow-up can leave your request in limbo.

Conclusion

Requesting penalty abatement requires thorough preparation and understanding of IRS requirements. By following these steps and avoiding common pitfalls, taxpayers can improve their chances of successfully obtaining penalty relief. Always consider consulting with a tax professional for complex situations or if you encounter difficulties during the process.