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.
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.
If the penalty in question applies to your situation, you may qualify for abatement if you meet the so-called “clean compliance rules:”
To request first-time penalty abatement, you can take one of three routes:
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.
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:
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.
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.
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.
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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