Penalty Abatement and first-time Penalty Relief

If you have penalties on your tax return, you might be able to get them abated by the IRS with ease, because of IRS penalty abatement. Good news, right? Penalties can add up quickly and be a burden when you don’t think you should be facing them. However, the IRS has to acknowledge that taxpayers do make honest mistakes and do experience tough times in their lives. The reason for relief programs is because of that. This blog provides a definition of penalty abatement, details of first time relief, which penalties may be eligible for abatement, other considerations, and how to appeal an IRS penalty. 

What is IRS penalty abatement and who may be eligible for penalty relief?

IRS penalty abatement is the agreement of the IRS to delete or “abate” part or all of a penalty from your tax account. Typically, interest compounded on a penalty will be lowered when a penalty is removed. A taxpayer may be eligible due to no extortions, unforeseen circumstances, or incorrect written advice from the IRS. Most of the time, relief is not automatic. It is typically not what you can see on its own. The IRS takes everything into consideration, and a straightforward request is a big factor.

Tax Penalties for Late Filing, Late Payment and other Violations

A tax penalty assessment is when the IRS puts a penalty on your tax account for violating a tax rule. Failure-to-file penalty is the 5% of unpaid taxes per month, up to 25%.Failure-to-pay penalties are generally 0.5% per month, up to 25%, although reduced or higher rates may apply in certain circumstances. Failure-to-deposit penalties could apply to businesses that deposit their payroll taxes late. Other penalties are for incorrect returns, or for underpayment of estimated returns. The first two charges can be the first penalties and consequences of late tax filing, and they can escalate quickly. Also, interest is charged on any unpaid tax and penalties until they are paid in full.

Who is eligible to apply for the IRS First-Time Penalty Abatement program?

The First-Time Penalty Abatement program, commonly referred to as FTA, provides administrative penalty relief to eligible taxpayers with a history of tax compliance. In general, there are three easy tests for first time eligibility for abatement. First, for the three taxable years preceding the year in which the penalty is rendered, you didn’t have a significant penalty. Second, you are up-to-date on any returns that are presently necessary, or on valid extensions. Thirdly, you have paid the taxes that you owe or have arranged a payment plan and are following it. Any person or business may be eligible. This is one of the easiest types of relief, because you don’t have to explain why the penalty occurred.

Checking Prior-Year Compliance and Filing History Requirements

Viewing your past history – request your IRS account transcripts online and/or by mail. Your transcripts will display filing dates, payments made and all penalties levied. There are penalties that won’t affect you, like the estimated tax penalty. The IRS already removed penalties for reasonable cause for any changes that do not count. If you did use FTA in those days, however, you might not be eligible again. The IRS looks at the same kind of return that is filed by businesses, such as a payroll return or partnership return. Planning in which year to ask for makes quite a bit of difference, as FTA is generally applied to the first year, if you have penalties in several years.

What IRS penalties are eligible for First-Time Penalty Abatement?

First-Time Penalty Abatement is for three primary penalties: failure to file, failure to pay, and failure to deposit for payroll taxes. In some instances, FTA can also help you avoid late filing penalties on partnership and S-corporation returns. These are the most likely charges to have for many taxpayers, making FTA an effective difference-maker.

FTA doesn’t cover all penalties, though. It typically won’t be able to remove the accuracy-related penalty, which is imposed when taxes are underpaid substantially. It also doesn’t apply to estimated tax penalties and fraud penalties. Other types of relief may be required for them.

What factors may lead to penalty relief for a taxpayer who is not eligible for First-Time Abatement?

Even if you are not eligible for FTA, you could still receive IRS tax penalty relief by using what the IRS calls “reasonable cause.” This refers to an event that prevented you from filing and/or paying as scheduled, despite your best efforts to do so according to the rules. The IRS is looking to see that you exercised ordinary care and took steps as quickly as possible. You need to describe what, when, and how it happened to you. The lack of funds, alone, is rarely sufficient, but it may be significant in conjunction with other facts.

Qualifying Circumstances

• Major health issue or hospitalization: suffered from a serious health issue or hospitalization by you or a close family member.
• Death in the family: A relative, child or parent died close to a deadline.
• Natural disaster: Your home or records were damaged by fire, flood or storm.
• Unable to obtain documents: You have tried to get required documents but have not.
• System issues: You missed filing or paying on time because of technical issues with the system.
• Mail issues: Proof indicates that you mailed your return on time.
• The truth counts: Doctor’s letters, death certificates, or insurance reports are clear ways of supporting your story.
• Affected areas: The IRS will typically allow extra time on tax deadlines in disaster areas.

What is the best way for the taxpayers to ask the IRS to remove the penalty?

You can request penalty abatement in three ways. The fastest is often a phone call to the number on your IRS notice. If you qualify, the IRS might approve the request during the call for FTA. Additionally, a written letter that states the reasons for eligibility may be written. If you are claiming a number of penalties or years, A third option for certain eligible claims is Form 843, Claim for Refund and Request for Abatement, subject to the form’s instructions.

Requests may be made prior to or after paying the Penalty. You might be eligible for a refund if you’ve already paid. Don’t forget the time limits, as most refund claims are filed within three years of filing the return or two years after paying the tax, whichever is later.

If the IRS denies you, there are options available. Your appeal rights and deadline are provided in your denial letter and will be different based on the letter. Many times, if the IRS feels that there are grounds for a written request to the Independent Office of Appeals of the IRS for separate review of the case. Make copies of all letters, call notes and documents sent.

If your case is for a large amount, for several years, or a business, seek professional assistance. Form 2848 is a tax form that allows a licensed professional to talk to the IRS on your behalf. H&M Tax Group will review your penalty notices, determine your eligibility and assist you in crafting a well-informed and precise request or appeal and ensure you proceed with confidence.

Conclusion

Tax penalties can be onerous, but there may be a way to get some relief as long as you know the rules. Look at your history, collect your proof and seek IRS assistance the proper way. When the quantities are huge or the information is confusing, ask a professional. H&M Tax Group is a local tax advisory group to assist your person or business deal with IRS matters correctly and also coolly. Our income tax filing, bookkeeping and QuickBooks services also ensure timely filing and payment, reducing the likelihood of any future income tax penalties. Give H&M Tax Group a call today, and we will help you get a clean record.