Taxpayers often dread paying IRS penalties. Unfortunately, many do not request relief or are denied due to not following essential guidelines. Although requesting post-filing relief or “abatement” may not always be practical, relief is accessible for two of the most common IRS penalties by adhering to specific rules.
Common IRS Penalties
The IRS imposes over 150 different penalties for late filing, late payment, return errors, and other noncompliant activities. The three most common penalties are:
- Failure to File Penalty: 5% per month on the balance due, up to a maximum of 25%.
- Estimated Tax Penalty: Equivalent to the interest lost from insufficient withholding or not paying estimated taxes throughout the year.
- Failure to Pay Penalty: 0.5% per month on the balance due, up to a maximum of 25%.
In 2019, these penalties constituted 95.5% of all IRS civil penalties for individual taxpayers.
Relief from IRS Penalties
Taxpayers can request penalty relief. For the failure to file or pay penalty, taxpayers can request the IRS to “abate” the penalties. Abatement removes the penalties after they are assessed. The Failure to File (FTF) and Failure to Pay (FTP) penalties are typically abated as they are automatically assessed by the IRS’s computer systems.Other penalties require different procedures for relief. For instance, the estimated tax penalty generally cannot be abated but can be excluded when filing the tax return using Form 2210. Penalties proposed during IRS audits, such as accuracy or fraud penalties, often require dealing with IRS auditors or appeals officers before assessment. These penalties may also be abated, but the process could involve special IRS procedures or court action, taking years to resolve.
Few Penalties Are Abated Each Year
In 2019, only 12% of FTF and FTP penalties were abated. For individual penalties, only 9% were abated. Several factors contribute to the low abatement rate: many taxpayers do not request abatement, initial requests are often denied, and taxpayers may not appeal the IRS’s adverse determinations.
Increase Your Chances of FTF and FTP Penalty Abatement
For FTF and FTP penalties, the IRS abates penalties primarily for two reasons:
- Reasonable Cause Relief (RC): Demonstrating ordinary care and prudence but inability to comply due to unforeseen circumstances.
- First-time Penalty Abatement Relief (FTA): Applicable to taxpayers in good standing with no penalties in the past three years.
Do’s and Don’ts for Penalty Abatement
Do’s:
- Utilize FTA: All first-year FTF and FTP penalties, regardless of reasonable cause, can use FTA. Taxpayers should call the IRS to request abatement for qualifying penalties.
- Request reasonable cause in writing: Complete Form 843 or a letter detailing the rationale and evidence for reasonable cause.
- Appeal adverse determinations: Appeal if the IRS’s initial determination does not consider all circumstances.
- Include specific details: Provide clear circumstances, demonstrate the impact on other areas of life, and supply evidence and a chronology of events.
- Show prior compliance: Explain any prior year penalties and highlight a positive compliance history.
- Follow up: Ensure the IRS is actively working on your abatement request and intervene with the Taxpayer Advocate’s office if necessary.
Don’ts:
- Do not pay the penalty before requesting abatement: This could eliminate the option for a Collection Due Process (CDP) hearing.
- Avoid using weak excuses: The IRS rejects FTF abatement based on reliance on a tax professional or financial hardship.
- Request timely abatement: Abide by the statute of limitations, typically three years from the filing date or two years after paying the penalty.
Timing Expectations
Penalty abatement can take time. FTA can be approved instantly over the phone, with final reductions appearing in about three weeks. Abatement for reasonable cause might take 2-3 months for an initial determination and an additional 6-12 months if an appeal is necessary. For assistance with your tax issues, Tax Resolution Services In Hawaii can provide various ways to help.
Conclusion
Navigating IRS penalties can be daunting, but understanding the process and knowing your options can significantly improve your chances of relief. By following the outlined guidelines for abatement requests, taxpayers can avoid common pitfalls and increase their likelihood of success. Remember to act promptly, document your circumstances thoroughly, and consider seeking professional assistance when necessary. Tax Resolution Services In Hawaii is available to help you address your tax concerns and find the best resolution for your situation. Don’t let IRS penalties overwhelm you—take action and secure the relief you deserve.
