Understanding IRS Abatement of Tax Penalties

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February 28, 2019

  • First-time penalty abatement for failure-to-file and failure-to-pay penalties is available for taxpayers who are in “good” standing with the IRS.
  • You can also request penalty abatement in the case of hardship, such as a natural disaster or death or illness in the family.
  • If your penalty abatement is not approved by the IRS, you have 60 days to appeal this decision.

If you do not file or pay your taxes on time, the associated penalties can be expensive. This expense is compounded by the fact that monthly interest is assessed on both your past-due balance and the penalties. However, in some cases, taxpayers may qualify for IRS abatement programs.

First-Time Penalty Abatement

The first-time penalty abatement program is an administrative waiver granted to taxpayers who meet certain criteria. Penalty abatement means that the IRS will remove the fees in question from your account. In general, if you have followed IRS guidelines and have not been assessed a penalty before, you can ask the IRS to waive some types of penalties. Abatement is good only for a single tax period and does not apply to future penalties.

For individual taxpayers, you can seek abatement for failure-to-file and failure-to-pay penalties, which are two of the most common IRS fees. Businesses can also seek abatement for the failure-to-deposit penalty. You cannot seek abatement for penalties associated with estate and gift tax returns, estimated tax, and accuracy. However, if you have made a good faith effort to file your taxes accurately, you may be able to appeal the latter penalty.

Understanding IRS Abatement of Tax Penalties

Qualifications for Abatement

If the penalty in question applies to your situation, you may qualify for abatement if you meet the so-called “clean compliance rules:”

  • You have not accrued any significant penalties on the same type of tax return for the past three years. The IRS considers a significant penalty to be at least $1. Estimated tax penalties do not prevent you from abatement through this program, however, nor do penalties that were later abated for cause.
  • All your outstanding tax returns must be filed.
  • You must be current on any outstanding IRS payment arrangement.

Requesting Penalty Abatement

To request first-time penalty abatement, you can take one of three routes:

  • If you are filing or paying your taxes late and expect to be assessed a penalty, file your tax return on paper along with a penalty non-assertion request to ask that abatement for the return in question be granted.
  • If the penalty has already been assessed, you can call the IRS or request an abatement by writing a letter. You can also request an abatement from the IRS online.
  • If you have already paid the penalty, complete and submit Form 843, Claim for Refund and Request for Abatement. This type of request is valid only if the return in question was due within the past three years or filed within the past two years.

A request for abatement by phone results in an instant decision and the penalties will be removed from your account within two to three weeks. If you apply by mail, you’ll get a decision within two to three months.

Abatement for Reasonable Cause

You can also request penalty abatement if you have a justifiable reason for filing or paying your taxes late. You must establish in good faith that you used care to meet your tax obligations but were unable to do so because of circumstances beyond your control. The IRS will take all related circumstances into account when making this determination. Some reasonable causes that can result in abatement include the following:

  • Natural disaster, fire, or casualty
  • Loss of records
  • Incapacitation, serious illness, or death of the taxpayer or a member of his or her immediate family
  • Erroneous guidance from a trusted adviser
  • Undue hardship
  • Ignorance of the law

A lack of funds is not considered reasonable cause for failure to file or pay your taxes, but the underlying reason for the lack of funds may constitute reasonable cause.

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Estimated Tax Penalty Abatement

In some cases, you may qualify for abatement of estimated tax penalties. These penalties occur when you do not withhold sufficient taxes from your paycheck if you are a wage worker or do not make sufficient estimated tax payments if you are a small business owner or freelance worker.

Estimated tax penalties are rare, representing only 1% of annual penalties. You can file Form 22100 with your return to ask the IRS for abatement of estimated taxes. If you did not make the correct estimated tax payments because of hardship, you can file Form 843. In many cases, you will receive a decision within two to four months.

Accuracy Penalty Abatement

If the IRS finds that your taxes were underreported or otherwise inaccurate during the audit or inquiry process, you can be charged a penalty of up to 20% of your tax balance. You will receive Notice CP2000 and will be able to contest the penalty before it is assessed. However, the process can take years for the appeal to be decided since the IRS will have to reopen your audit case and look at the evidence at hand.

If you ask for penalty abatement during the audit but were denied, or you agreed to the penalty before requesting abatement, your request will likely not be considered by the IRS. However, you can file a claim to request abatement after the taxes and penalties in question are paid.

Appealing an Abatement Determination

The IRS uses a software tool called the Reasonable Cause Assistant to determine your eligibility for abatement. However, this tool may return incorrect determinations. If your request for abatement is turned down, you or your tax preparer can request an appeal.

Follow the instructions on IRS letter 854C, which will outline the steps to request an appeal. You must make this request within 60 days of receiving this letter. In many cases, an appeal takes at least three months and can last up to nine months. However, if the IRS is taking steps to collect taxes from you, you can request a Collection Due Process hearing to expedite the appeal.

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