Do not pay an IRS Penalty without looking into Penalty Relief
Can IRS forgive penalties
The vast majority of penalties are not abated by the IRS. Why? It could be because people don’t know how to ask for penalty relief or that it may seem too difficult. Here are some reasons why it's worth it.
To encourage compliance, the IRS uses penalties a lot. The IRS is responsible for assessing millions of penalties each year that amount to billions of dollars. The IRS offers several options for those who are eligible to have penalties removed or abated.
For not filing and not paying taxes, the IRS has the most severe penalties
The Internal Revenue Code contains almost 150 penalties. However, there are a few more common penalties that makeup 74%. These are the most popular penalties:
- Penalty for failure to pay penalty - 56% on all penalties if you fail to pay taxes on time
- Failure to File Penalty - 14% of all penalties imposed if you fail to file a return in time
- Failure to Deposit Penalty - 4% of all penalties imposed on businesses that fail to pay their employment taxes on time or incorrectly
Late-filing penalties for S corporations and partnerships are a common nuisance penalty. Taxpayers often contest the estimated tax penalty by making an exception to their tax returns.
Can IRS Forgive Penalties?
The IRS will not remove penalties for these reasons
Request a penalty abatement to reduce the most commonly used penalties.
1. Statutory exception: Proving a specific, authoritative exclusion to the penalty
Statutory exemptions are rare and can be explained to the IRS easily, usually at tax filing. Examples of such exceptions are combat zone relief and disaster relief.
2. IRS error: Documenting the fact that the error resulted from IRS advice
This penalty relief argument is rarely used and is often unsuccessful. The IRS does not routinely provide tax advice in writing. You must document any erroneous IRS advice that you have relied upon. Although the Internal Revenue Manual says that penalty relief is available for errors in oral advice, it is very rare.
3. Reasonable cause is a reason you can't comply with the request based on your facts.
People often argue that they were guided incorrectly by their tax software or tax professionals. This argument falls under Reasonable Cause.
You must show that you used ordinary business care and prudence but were unable to comply to present a reasonable reason for late payment and filing. Also, you must show that your non-compliance wasn't due to willful neglect.
Most people aren't successful in presenting reasonable cause arguments to the IRS, particularly in court. Most penalty abatement decisions never reach court. The IRS makes most administrative decisions.
You must ensure that the IRS considers all facts and circumstances to be successful with reasonable cause determinations. You should appeal any penalty abatement rejection letter that does not address all of your facts and arguments.
4. Administrative waiver: Taking advantage of a provision that facilitates tax administration
Under certain conditions, the IRS may grant administrative relief from a penalty. First-time penalty abatement is the most common administrative waiver.
FTA can be used for failure to file, failure to pay, or failure to deposit penalties in one tax period if you have a clean compliance record for the last three years. FTA can be used to abate penalties on Form 1040 and Form 1120 as well as payroll and pass-through entities.
FTA is the most straightforward option for penalty relief. It is possible to request FTA by calling the number listed on your IRS notice. If applicable, your tax professional can also call the designated tax pro hotline and compliance unit to request FTA for any penal amount.
If certain criteria are met, the first-time penalty abatement (FTA waiver) is an administrative waiver that may be granted by the IRS to taxpayers who fail to file, fail-to-payor fail-to-deposit penalties. This procedure rewards taxpayers who have a clean compliance record. Everyone is entitled to one error.
FTA may be requested by individuals and businesses for failure to file, failure to pay, or failure deposit penalties. FTA does not apply to any other penalties, such as the accuracy penalty, returns with an event-based filing requirement like Forms 706, 709, or information reporting that relies on other filings.
Additional guidance
Refer to IRM20.1.1.3.6, Reasonable Cause Assistant (RCA), and IRM20.1.1.3.3.2.1 First Abate (FTA),.
The following criteria are required for taxpayers to be eligible for FTA waiver:
Compliance: You must have filed all required returns (or extended the deadline for filing them) and you can't have any outstanding requests for returns from the IRS.
Payment compliance - Must have paid all taxes due (can be made in installments if they are current).
Clear penalty history: There have been no previous penalties (except for a possible tax penalty) in the three preceding years.
Please note that IRM 20.1.1.3, Criterion for Relief from Penalties, penal relief under administrative waivers (which includes FTA) must be taken into consideration and applied before reasonable cause.
Phone to request penalty abatement
If the tax practitioner is not being assigned to a particular compliance unit (examination or collection), he or she may call the IRS Practitioner Priority Service line (PPS) at 866.860.4259 and request FTA. To request FTA, the practitioner should contact the unit that is handling the case. To request penalty abatement over the telephone, a tax practitioner will need to have authorization ( Form 2848. Power of Attorney and Declaration of Representative). The IRS representative who answers the call should have the ability to pull up the client's account and determine if FTA criteria have been met. If so, the IRS agent will apply for the waiver. A letter would be sent to the taxpayer indicating that penalties have been removed based on FTA criteria. It is recommended that the taxpayer follow-up with the IRS if the letter does not arrive within 30 days of the date of the call.
Tip Often, calling the IRS to request FTA is the best way to do so. Many penalties can be quickly removed during a phone call. Sometimes, however, the IRS may not be able to reduce the penalty amount over the telephone. To request FTA, the tax practitioner must write to the IRS. It is also advisable to send a letter to IRS to confirm that the IRS has lowered penalties by calling. Include the date, agent's name, and identification number.
Send a letter or mail to request a penalty reduction
A tax practitioner can request FTA for his client by writing to the IRS instead of calling the IRS. All relevant information should be included in the request, including taxpayer name, identification number, and tax year/period. It is important to clearly state that the client meets FTA criteria. Attach transcripts from clients that can prove compliance with filing/payment requirements and a clean history of penalties (Form 2848). All pages sent to IRS must include page numbers, taxpayer's name, and their identification number's last four digits.
Considerations
FTA is only applicable to one tax year/period. FTA does not apply to requests for penalty relief for multiple tax years/periods. If the FTA criteria are met, penalty relief will only be granted for the first tax year/period. All subsequent tax years/periods are subject to penalty relief based on other provisions such as reasonable cause criteria.
If the IRS has not assessed the penalty, then a client may file a late return and fail-to-file or failure-to-pay penalties will apply. The taxpayer can attach a penalty request nonassertion to the late-filed returns.
To request a refund, a client who has already paid the penalty may file Form 833, Claim for Refund, or Request for Abatement.
Consider appealing to the Appeals if the IRS refuses to grant penalty relief. The appeals may reach a different conclusion based on other factors such as the hazards of litigation.
Although each case is unique, the CPA (client advocate), cannot request abatement for the client. With a simple telephone call or letter to IRS, clients can save thousands on penalties and rely on their tax professional for assistance.