How Penalty Abatement Works

If the Internal Revenue Service (IRS) has imposed penalties on you for failing to comply with tax rules, you’re not alone. In 2012, the IRS assessed a total of $26.8 billion in penalties against 37.9 million taxpayers. Sometimes, despite your best efforts, circumstances prevent you from meeting IRS obligations. In such cases, you may be able to reduce or eliminate your tax penalties by requesting an IRS penalty abatement. The IRS will review your situation, and if you qualify, they may waive the penalty so that you are no longer liable to pay it. In 2017, the IRS abated nearly one-third of all penalties assessed, totaling approximately $9 billion.

Types of Tax Penalties Eligible for Relief 

There are primarily three types of penalties eligible for IRS penalty relief:

• Failure to deposit taxes
• Failure to pay penalties
• Failure to file a tax return

The IRS generally does not impose penalties if you’ve made arrangements with them to fulfill your obligations. For instance, filing for a tax return extension does not violate IRS rules, hence no penalty should apply. Similarly, being on an IRS installment agreement does not incur penalties as long as payments are current. However, failing to keep up with payments could lead to a failure-to-deposit penalty.

Types of IRS Penalty Abatements

Just as there are various types of penalties, there are different forms of IRS penalty relief:

• Statutory exceptions
• Administrative waivers
• Reasonable cause penalty abatements

Each type has its own eligibility criteria and applies to different circumstances.

Not all penalties qualify for abatement. One notable exception is the estimated tax penalty, typically imposed on self-employed individuals or businesses. If you owe an estimated tax penalty, you cannot seek abatement for it. However, it does not count against you when requesting abatement for other past penalties.

Statutory Exceptions 

Statutory exceptions involve specific circumstances where the IRS may remove penalties. For instance, if you received incorrect written advice from the IRS leading to non-compliance, the IRS may waive the penalty upon demonstrating the erroneous advice received, your original request for advice, and related tax forms. Other qualifying situations include being in a combat zone, recently becoming disabled, newly retired, or having no tax liability in the previous year.

Reasonable Cause IRS Penalty Abatement 

If circumstances beyond your control prevented timely tax filing or payment, the IRS may grant a reasonable cause penalty abatement. Examples include hospitalization, incarceration, inpatient drug rehabilitation, serious illness or death of a family member who owes taxes, fire, natural disaster, or accidental destruction of records. This type of abatement is more accessible than others because an IRS employee reviews your case instead of automated systems. However, you must provide documented evidence of the circumstances and demonstrate a good faith effort to meet obligations despite the situation.

It may be more challenging to obtain a reasonable cause abatement if you have a history of past penalties. The IRS may be less inclined to grant relief if you have repeatedly violated tax rules.

First-Time IRS Penalty Abatement 

The first-time penalty abatement is a widely available administrative waiver. It allows the IRS to waive eligible tax penalties if it’s the first time they’ve assessed penalties against you, and you are in good standing otherwise. Even if you’ve had previous penalties, if they were for estimated taxes only, you may still qualify. Similarly, if you have a history of making arrangements with the IRS for late tax filings or payments, this should not disqualify you.

If your initial request for first-time penalty abatement is denied but you believe you qualify, you can request a reconsideration from your assigned IRS agent. The IRS decision-support software tool sometimes inaccurately determines eligibility for this form of relief.

How We Can Help with Penalty Abatement 

If you’re not eligible for abatement, there may be other tax relief options available. Contact Tax Review Solutions to explore how we can assist you.