To encourage tax compliance, the IRS is able to impose almost 150 penalties. This approach definitely uses more stick than carrot, but it’s not quite as awful as it sounds. If you’ve never had an issue with the IRS before, you can ask for (and likely get) some penalty relief. 

Intro to IRS Penalty Relief

The IRS uses tax penalties to encourage taxpayer compliance, not to make money. As such, they created the tax penalty abatement program. This program gives tax offenders who are normally compliant an opportunity to reduce or eliminate IRS penalties.

This program can save taxpayers hundreds and even thousands of dollars. Unfortunately, most taxpayers don’t know about it. In 2010, more than 90 percent of the individuals who qualified for tax forgiveness under the abatement plan failed to utilize it. Part of this was due to taxpayer ignorance of the program. Part was also caused by the failure of IRS agents to properly process abatement requests.

Reasons the IRS will Remove Penalties

Of course, the IRS won’t waive tax penalties for everyone or in all circumstances. Individual taxpayers can use the forgiveness program to request relief from penalties related to a failure-to-file or failure-to-pay. Penalties for errors in estimated tax payments or for inaccuracies on your return, however, aren’t eligible for the forgiveness program.

Businesses may also request tax penalty abatement if faced with penalties for failure to file, failure to deposit, and failure to pay

First-Time Abatement Waiver

In order to qualify for a first-time abatement waiver, you need to have a good track record with the IRS. This means that the IRS has not issued you any tax penalties for the last 3 years. You’ll also qualify if you haven’t ever had to file a return in the past.

To be eligible, you’ll also have to be compliant with your current year’s tax return. This means that you filed your return by the due date or filed an extension. It also means that you have paid your taxes or arranged to pay them with an IRS payment plan.

Note that failure-to-pay penalties continue to accrue every day. As such, it’s often in your best interest to delay asking for abatement of failure-to-pay penalties until you have your finances in order. Wait until your tax debt is paid or until the IRS accepts a payment arrangement from you. Otherwise the IRS may forgive only part of your penalty.

Reasonable Cause

If an unexpected situation puts you behind with the taxman, you might be able to avoid paying any related penalties under the reasonable cause exemption. Reasonable causes include fire, natural disasters, serious illness, or circumstances similar in nature. Don’t expect the IRS to take your word for it, however. You may need to prove that you experienced a disaster.

The IRS will expect you to explain how and why the incident prevented you from filing or paying your taxes on time. They can ask you to produce hospital records, court records, a letter from your physician, a death certificate, or other proof of the event in question. 

Statutory Exception

The statutory exception allows you to avoid penalties caused by the IRS. Everyone makes mistakes, including IRS agents. If the IRS sent you written advice or instructions that turn out to be incorrect, you can ask that any resulting penalties be waived. 

This one is tricky. To get a statutory exception, you may have to provide the IRS with a copy of your written request for advice and the written advice you then received. If the IRS sent you a report on which they made erroneous adjustments to your tax return you’ll need a copy of that also.

Note that, unless the IRS recorded your call, it’s very difficult to seek an exemption due to erroneous oral advice. This is another reason why it’s best to make sure every interaction you have with the IRS happens in writing whenever possible.

Other Forgiveness Options

The penalty waiving tactics discussed above all share one thing in common: they assume you have either paid off your tax debt or devised a plan for doing so with the IRS. Not everyone is so lucky. If you can’t pay your taxes right now, you do have two options for trying to eliminating the penalties so you can at least stop the bleeding.

Offers in Compromise

If you don’t know how to pay back taxes feasibly, you can try to negotiate an offer in compromise with the IRS. Under this arrangement, the IRS agrees to settle your tax debt for less than you owe. You are not eligible for an offer in compromise if you’re currently involved in an open bankruptcy case, however. You also need to be current on all of your tax returns and form filings.

To request an offer in compromise, you need to send the IRS a Form 656-B along with a non-refundable $205 fee. You can ask to have this fee waived if your income is low. The IRS will suspend any collection activities while it reviews your offer. If they accept your offer, they will ask for a 20 percent down payment. If you will be making monthly payments, you’ll need to pay the first monthly installment instead.

If the IRS has filed any tax liens against you, they will stay in place until you have finished paying off your offer in compromise. Note too that the IRS makes certain taxpayer information public as related to offers in compromise. Other people could learn how much tax you owed and how much you settled the debt for.

Understand that when you see people advertising on televisions, claiming they can settle your IRS debt for pennies on the dollar, all they are doing is asking the IRS for an offer in compromise on your behalf. Some of these outfits are legitimate, but others are pretty shady and best avoided. At the end of the day, they don’t know any secret tricks or have any special clout with the IRS. The truth is, you’ll save money by knowing how to settle with the IRS by yourself. If you want help, contact a CPA rather than a tax relief company.

“Currently Not Collectible” Status

Another option is to ask the IRS to place you in “Currently Not Collectible” status. To qualify, you must show that you can’t pay your taxes and your living expenses. You’ll have to document your income and prove the claim, but doing so can stop the IRS from trying to collect from you right now.

It’s crucial that you understand that this is a temporary status. It doesn’t make your tax debt go away, and you might keep accruing penalties and interest. The IRS will contact you in the future and review your status to see if you still qualify as uncollectible. If and when your status changes, collection practices will resume.

Although a not collectible status stops any current collection activities, the IRS can still file a tax lien against you.

Get Help From a Pro CPA

Sometimes life happens, and there are a number of reasons why you may have fallen behind on your taxes and incurred a few penalties. You certainly don’t need to beat yourself up over it, but you may want to get some help making sure it doesn’t happen again.

At Picnic Tax, we can help you devise a plan so that whatever went wrong doesn’t do so again. We can also answer your questions about any tax penalties your currently facing and, if you wish, help you file the paperwork to request a tax penalty abatement. Contact us today and we’ll get a jump on trying to reduce or eliminate your tax penalties.