What is Penalty Abatement?
Tax penalty abatement is defined as the temporary or permanent reduction of one’s tax debt. This may occur by requesting relief from certain federal penalties or interest. It is possible to receive an abatement in several different situations. For instance, an abatement may be afforded if there was an error by the IRS, a delay in your return, or if it is your first offense. To request an abatement, use Form 843 which can be found on IRS.gov. Abatement can be the easiest tool overall to save money on past due tax. It is also the most overlooked cause of action. For example, if you filed all returns and paid all taxes when they were due, and were not audited or otherwise adjusted, and then you failed to file or pay on time and the IRS hit you with a penalty, then you qualify to have the penalty abated. This can be done with a simple phone call by an attorney. It doesn’t matter how much the penalty is, if you qualify, then you do not have to pay that penalty.
If you have a history of filing your tax returns on time, paying your debts, and generally following the IRS rules, you may be eligible for a first-time penalty abatement. First-time abatement may allow a tax payer to avoid IRS penalties such as failure to file penalties and failure to pay penalties. 5 I.R.M. Abr. & Ann. § 18.104.22.168.3.2.1. Consequently, the IRS rewards rule-abiding taxpayers with penalty forgiveness, resulting in savings ranging from hundreds to thousands of dollars.
In order to qualify for first-time abatement, you must not only be current on all your returns, but you must also have not received any significant penalties over the course of the previous three years. Upon request of a first-time abatement, the IRS will utilize a software tool known as the Reasonable Cause Assistant. There has been much criticism and disapproval regarding the system, and often times it may be necessary to contact the IRS directly and request an override of the system. This can be accomplished with a phone call by an experienced attorney, keeping costs low.
Reasonable Cause Abatement
If you are able to prove that there existed a legitimate reason for why you did not file your return or pay your tax debt, a reasonable cause abatement may be granted. When assessing a request for a reasonable cause abatement, the IRS will look at all the facts and circumstances in your situation. 5 I.R.M. Abr. & Ann. § 22.214.171.124.2. Some instances that may allow for a reasonable cause are listed below. These circumstances come straight from the Internal Revenue Manual, which outlines how IRS employees are to attack problems and requests from taxpayers. The numbers above the sections are the corresponding IRM sections, and more information can be found by googling those sections.
- Taxpayer’s Reason:
- Compliance History:
- Length of Time:
- Circumstances Beyond the Taxpayer’s Control:
- Effect on the taxpayer’s business
- Steps taken to attempt to comply
- If the taxpayer complied when it became possible
The IRS will consider:
- Why the records were needed to comply.
- Why the records were unavailable and what steps were taken to secure the records.
- When and how the taxpayer became aware that he or she did not have the necessary records.
- If other means were explored to secure needed information.
- Why the taxpayer did not estimate the information.
- If the taxpayer contacted the IRS for instructions on what to do about missing information.
- If the taxpayer promptly complied once the missing information was received.
- Supporting documentation such as copies of letters written and responses received in an effort to get the needed information.