An IRS penalty abatement is the best way to eliminate IRS penalties for late payment and late filing. An IRS penalty abatement doesn’t reduce the underlying tax, just the penalties associated with that tax. However, the IRS penalty abatements are few and far between. You had better have a good story (excuse) ready before you request an IRS penalty abatement.
When you file your returns late, or are unable to pay a tax, you have three components to your IRS tax debt – the tax payable, interest which begins on the date the return was due, and penalties from filing late and/or paying late. When you agree with the amount of tax due, and you understand that interest for late payment can’t be waived under any circumstances, then you are left with the penalties.
These IRS penalties can be 25% to 50% of the tax, so they often make up a significant portion of your total IRS tax debt. An abatement targets these penalties and is based on fairness – it would be unfair to hit you with these fees because the late filing or late payment was outside of your control.
Note that and IRS penalty abatement is not based on your ability or inability to pay the tax, interest or penalties. It is based solely on fairness. Whether you can afford to pay or not does not come in to the equation. If you are unable to pay the debt, then you need an installment agreement or an Offer in Compromise.
If you wish to file for an IRS penalty abatement, you should be able to prove that the late filing or late payment was due to an extreme situation – that you were victimized by factors beyond your control. And you story had better be convincing. The IRS approves very few penalty abatements.
Here are a few grounds for an IRS penalty abatement:
- destruction of records,
- divorce (along with a good story),
- death in the family,
- incarceration, or
- erroneous written advice from the IRS.
These, along with an other significant disruption of your life, are the best arguments for a tax penalty abatement.
It is rare for written advice from your CPA or tax professional to result in an IRS penalty abatement. Most tax people have disclaimers on the bottom of their letters and emails stating their work can’t be used to challenge interest or penalties. While you can sue your tax person for erroneous advice, getting your tax penalties reduced or eliminated as a result is unlikely.
I hope this article helps get you through the IRS penalty abatement process. For many of us, it is the best option… especially if you can’t contest the underlying tax amount.