IRS Penalty Abatement – A Complete Guide
If you make a mistake with your federal income taxes – be prepared to pay some tax penalties. You may want to try and get these penalties waived, however, if you believe you have reasonable cause.
However, the IRS always has an advantage over the average taxpayer, so even if you attempt to abate tax penalties – be aware that it may not work.
How Many IRS Tax Penalties Are Abated?
The majority of tax penalties fail to get abatement. Just last year, a measly 12% of FTF (failure to file) and FTP (failure to pay) penalties got abated while individual penalties got the even lower number of 9% abatements.
Abatements, which are post-filing relief, can seem complicated and failure to follow the simple guidelines have attributes to those low successful abatement numbers from 2019.
If you’ve failed to file or to pay a penalty, don’t feel too stressed just yet. The majority of penalties are one of those two – FTF or FTP – so they’re not uncommon mistakes to make.
While the guidelines to follow are simple, they’re also particularly strict, so make sure you follow them properly.
IRS Tax Penalty Abatement Guidelines
Your situation may be as straightforward as the IRS making a mistake on your return or delaying it entirely. It may also be that the IRS gave you bad advice that only ended up in penalties for you, but you’ll have to have that advice in writing for it to qualify you for an abatement.
When seeking rebates for your FTF or FTP penalties, you’ll most likely aim for one of two different abatements: reasonable cause relief (RC) or first-time abatement relief (FTA). An FTF penalty accrues at 5% of any unpaid taxes every month while a FTA accrues at 0.5% of any unpaid taxes every month, so it’s important to get started on an abatement sooner rather than later.
Reasonable Cause Abatement – What Is It?
For an RC abatement, you’ll need to prove that despite your best efforts, you were unable to file or pay your penalty on time. The reasonable cause involved in your FTF or FTP needs to be one that was beyond your control.
Whatever it is, it has to have been something that, if it hadn’t gotten in the way, you would’ve filed or paid on time.
A good example would be if you had gotten into an accident and needed to be hospitalized for some months. You would need to provide proof of the accident and hospital stay for an RC abatement to be granted.
FTA Abatement – What Is It?
For FTA abatement, it’ll be the first time you have need of an abatement, meaning that before now you’ve been filing on time and paid all your taxes. On top of that, the last three years will have to be free of any penalties.
First-year penalties require an FTA, even if an RC would fit the situation too. This kind of abatement erases the original amount, but also erases any interest that the penalty has accrued. Luckily, FTA requests can be done over the phone.
Evidence And Proof For Tax Return Penalty Abatements
An RC claim, on the other hand, won’t be as simple as a phone call. The IRS requires a letter or Form 843 to be submitted to them.
Don’t forget that your RC claim is only credible if you can supply proof that you indeed have a reasonable cause for failing to file or pay. Beyond informing the IRS of what that cause was and why it was beyond your control, you’ll need to prove that that same cause affected other parts of your life, such as being able to work.
Your proof will need to be something rock solid, such as a doctor’s letter in regards to a medical emergency or a landlord or insurance’s letter for a home emergency.
After your claim is submitted, don’t be too surprised if it’s rejected. Since the IRS uses a computerized system that’s highly flawed, requesting an appeal against a rejection will ensure your case gets considered by a human instead of a computer alone.
Always be prepared to show proof of past compliance in filing and paying penalties. Especially if a past penalty is the reason your claim is rejected, you should be able to explain that penalty and ideally have proof for the circumstances surrounding it.
Whichever abatement you apply for, know that you may have to follow up on it. Abatement claims can easily get lost at the IRS and ensuring they have your claim is an important way to stay on top of things.
Whether the process retains its normal speed or is slowed thanks to a lost abatement claim, make sure a collection hold is placed on any unpaid penalty you’re seeking abatement for.
Whatever you do, don’t ignore the penalty. If you decide not to pay the penalty until the abatement is resolved, you should take action sooner rather than later.
If you don’t pay the penalty, you’ll eventually be allowed to request a Collection Due Process hearing, which not only increases your chances at getting the abatement but also takes less time than other processes.
Either way, most abatements will need you to have paid your taxes that are due free of a penalty before they’ll settle the matter of the abatement itself. It’s possible to change them to a payment installments if the payments are current, though.
Don’t forget that there’s a time limit to your efforts. The refund statute of limitations is normally two to three years depending on which abatement you’re pursuing.
While it might seem like a lot of time, letting that time go by without taking action almost guarantees a rejection from the IRS.
The time that the entire abatement process can take varies. It’s true that FTAs can be approved of in the same phone call in which they’re being filed.
However, even with that faster process, it can take three weeks to see the reduction of the penalty to actually happen.
Reasonable Cause Relief
RCs take far more time. Two to three months is a reasonable expectation for the whole process to finish, but much longer is needed if you need to appeal.
In the latter case, the process will jump from two to three months all the way up to six to twelve months, just another reason to take action sooner rather than later.
When the abatement is successfully finished and you see the penalty reduction, double check that it’s the correct amount. If not, it will need to be corrected as soon as possible.
Other Factors To Consider
You may be able to file a penalty abatement request – but that doesn’t necessarily mean it will be approved. There are all kinds of IRS issues – like deposit penalties, late-filing penalties, and even simple issues like noncompliance.
Each year, you must meet your tax obligations – and pay your tax due. The type of tax due is largely irrelevant, as the IRS just looks at the tax period due.
If you have a penalty history, you have even less likelihood to be able to abate an issue with the Internal Revenue Service. Your best chance comes with utilizing a tax professional, as they will be used to working with those who have a financial hardship.
Many tax pros will offer a free consultation, and may even help you craft an abatement letter – which will try to lower (or even eliminate) the penalty amount the IRS has levied upon you. If there is an issue with your federal tax forms, you can be very sure you’ll soon have an estimated tax penalty slide across your desk.
The Bottom Line On IRS Penalty Abatement
No matter what line of work you are in – your required returns must be filed during each tax year. A natural disaster is one of the only issues that is pretty likely to be waived – though if you are operating in good faith with the IRS, there is still a chance to have penalties abated.
Just make sure you have your taxpayer identification number handy when you are trying to barter for an installment agreement solution, or otherwise trying to lessen any IRS penalty. Penalty relief is not unheard of – though it is still somewhat uncommon.
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