March 20, 2015

tax penaltyThe primary purpose of IRS penalties is to punish the taxpayer for failing to comply and to encourage voluntary compliance. Penalties therefore incurred from incorrectly filing taxes or filing them late can be costly to the U.S. taxpayer, such as the penalty for late filing of tax returns that can reach up to 25 percent. Unfortunately, taxpayers facing hefty penalties are unaware that they may qualify for penalty abatement under the guidelines set by the IRS.

Tax penalty abatement is the process of having the IRS reduce or remove assessed penalties resulting from misfiled or late taxes. Although abatement does not free you from the responsibility of having to pay the tax that was underpaid, missed, or paid late, it does lift the majority of the penalty, if not the entire amount.

Qualifying for Penalty Abatement

A penalty abatement may be for you if you are able to pay the owed tax liability, but believe that you shouldn’t be held liable for the incurred penalties. If your application for abatement is approved, then the IRS expects that you are able to pay your tax liability in full.

In order to qualify for penalty abatement, you must first meet specific criteria, as well as possess an acceptable and convincing reason for failing to pay your taxes. According to the IRS guidelines, reasons include:

  • Significant financial hardship or lengthy time of unemployment
  • Major medical illness
  • Medical illness of a close loved one
  • Demonstrating your being physically unavailable
  • Ignorance of tax law
  • Reliance on a tax professional
  • Theft or destruction of your records
  • Casualty, natural disaster, or other disturbance out of your control
  • Death in the family

There is no one formula for approval of penalty abatement, as the IRS handles them on a case-by-case basis. Generally, however, the IRS follows the rule that penalty abatement should be granted if the taxpayer shows that ordinary business care and prudence was exercised in the handling of their taxes.

It must be noted that even if the above criteria is met, penalty abatement may not be the correct option for you if you are unable to pay 70 to 90 percent of the tax amount initially assessed. In most cases, you are unlikely to get penalty abatement if you have unfiled tax returns or if the IRS filed a SFR on your behalf.

First-Time IRS Tax Penalty Abatement

A first-time non-compliant taxpayer such as yourself may request for FTA relief or First-Time Penalty Abatement if, for the last three years, you have promptly filed and paid your taxes but still owe the IRS back taxes. Under this program, the IRS will waive any penalties for missed payments provided that you have fully complied.

First-Time Penalty Abatement does not apply to all penalties, however, but may work for failure to file, failure-to-deposit, or failure-to-pay—for one tax period. If you avail of the IRS FTA program, it is required that you maintain a clean record for another three years.

If you are granted penalty abatement for reasonable cause, then you need not worry about the three-year limitation, and you will be able to use the FTA program in a subsequent year.

Filing for Penalty Abatement

Before filing for tax penalty abatement, you must first ensure that you qualify and are able to provide the IRS with a convincing argument. Consult with an experienced IRS tax attorney who can help determine whether you qualify for penalty abatement and who can help you file the necessary documents.


Categories: Tax Penalties