Too often, taxpayers hit with penalties by the IRS simply accept them, write a check and move on. But in certain cases, it’s possible to get these penalties abated. That won’t happen, though, unless you ask.
Types of penalties
Generally, IRS penalties fall into one of three categories:
- Failure-to-file and failure-to-pay penalties,
- Estimated tax penalties, and
- Accuracy-related penalties.
Abatement relief varies depending on the type of penalty. Here are some general guidelines for seeking relief:
Failure-to-file and failure-to-pay penalties. First, make sure that the information in the notice you received is correct. If it is, determine whether you’re entitled to penalty abatement for reasonable cause. According to the IRS, it’ll consider any reason that establishes that you were unable to meet your federal tax obligations despite using “all ordinary business care and prudence” to do so.
The most common reasons are:
- Fire, casualty, natural disaster or other disturbances,
- Inability to obtain records, and
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or an immediate family member.
Other possible reasons include reliance on written or oral advice from the IRS, a math error or other mistake by the IRS, and undue hardship.
If you don’t have a good reason for filing or paying late, you may be able to apply for a first-time penalty abatement (FTA) waiver. To qualify for relief, you must satisfy three requirements: 1) You received no penalties (other than estimated tax penalties) for the three tax years preceding the tax year in which you received a penalty, 2) you’re current on all required returns or filed a valid extension of time to file, and 3) you’ve paid, or arranged to pay, any tax due. Be aware that, despite the expression “first-time,” you can receive FTA relief more than once, so long as at least three years have elapsed.
Regardless of whether you’re applying for reasonable cause or FTA relief, keep in mind that failure-to-pay penalties continue to accrue until they’re paid in full. So it’s a good idea to wait until you’ve paid the taxes due before requesting penalty relief.
Estimated tax penalties. Although it’s possible to obtain relief from estimated tax penalties on grounds of casualty, disaster or other unusual circumstances, such relief is rarely granted. You’re more likely to get these penalties abated if you can prove that the IRS made an error, such as crediting a payment to the wrong tax period, or that calculating the penalty using a different method (such as the annualized income installment method) would reduce or eliminate the penalty.
Accuracy-related penalties. These penalties may be imposed, for example, if the IRS finds that your return was prepared negligently or that there’s a substantial understatement of tax. You can obtain relief from these penalties if you can demonstrate that you properly disclosed your tax position in your return and that you had a reasonable basis for taking that position.
Generally, you have a reasonable basis if your chances of withstanding an IRS challenge are greater than 50%. Reliance on a competent tax advisor greatly improves your odds of obtaining penalty relief.
Other possible grounds for relief include computational errors and reliance on an inaccurate W-2, 1099 or other information statement.
If you believe that you’re entitled to relief from tax penalties, talk to your tax advisor. He or she can help you determine the appropriate grounds for relief, prepare any documentation necessary to support your claim and file an application with the IRS. For more information about our IRS Representation services, visit: https://www.tgccpa.com/IRSRepresentation.php
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