Tax Controversy & Resolution: Penalty Abatement

Penalty Abatement

In many tax debt cases the penalty and interest portion of the tax debt can become substantial as the amount accrues. However, taxpayers may remove or be refunded for past penalties and interest through penalty abatement or adjustment. Abatement refers to removing an assessed tax liability and an adjustment reduces or alters an assessed tax liability.

When a reasonable cause for abatement or adjustment is applicable, the IRS may review the penalties derived from an associated tax liability. Reasonable cause for abatement or adjust may include:

  • mailing a tax return or payment timely which contains inadvertent errors (e.g., addressed to the wrong location, wrong amount of postage);

  • death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family;

  • inability to obtain records;

  • error caused by the IRS; or

  • destruction of records by a fire, flood or other disturbances

 

Penalties eligible for penalty relief include:

  • Failing to file a tax return;

  • Failing to pay on time;

  • Failing to deposit certain required taxes; or

  • Other penalties as applicable.

IRS Form 843 (Claim for Refund and Request for Abatement) must generally be completed to request a tax penalty be removed or refunded.

AndreTaxCo can help develop tax resolution payment arrangements with the IRS to help resolve penalty and interest assessments. When certain reasonable causes arise which prevented you from paying your tax debt, and led to delinquency, AndreTaxCo can help challenge the penalties and interest for reduction or elimination.

Types of Penalty Relief

Relief from penalties generally falls into separate categories: Reasonable Cause, Statutory Exceptions, and Administrative Waivers (further outlined below).

Reasonable Cause

  • Reasonable Cause is based on all the facts and circumstances. The IRS will generally consider any reason which establishes all ordinary business care and prudence to meet your Federal tax obligations were taken. Solely a lack of funds is generally not reasonable cause for failure to file or pay on time. However, the reasons for the lack of funds may provide reasonable cause for the failure-to-pay penalty.

  • Facts Establishing Reasonable Cause:

    • What happened and when did it occur?

    • What facts / circumstances prevented timely filing your return or paying your tax?

    • How did the facts / circumstances affect your ability to file or pay your taxes or perform your other day-to-day operations?

    • Once the situation changed, what actions did you take to file and/or pay your taxes?

  • Supporting documentation generally helps establish reasonable cause defense (hospital or court records with specific dates, insurance claims of natural disasters, etc.).

Administrative Waiver and First Time Penalty Abatement

  • The IRS may provide administrative relief from a penalty for failing to file a tax return, pay on time, and/or to deposit taxes under its First Time Penalty Abatement policy if the following are true:

    • taxpayer didn’t previously have to file a return or did not incur penalties for the 3 tax years prior to the tax year in which you received a penalty;

    • taxpayer has filed all currently required returns or filed an extension of time to file; and

    • taxpayer has paid (or establishes an arrangement to pay) any tax due.

  • Note, the failure-to-pay penalty will continue to accrue, until the tax is paid in full. As such, it may be more beneficial to wait until the tax due is fully paid prior to requesting First Time Penalty Abatement from the IRS

Statutory Exception

  • Specific penalty-related Internal Revenue Code (IRC) sections may provide statutory exceptions where applicable. Furthermore, if the taxpayer received incorrect written advice from the IRS, the taxpayer may qualify for a statutory exception for relief. If a penalty is a result of erroneous written advice from IRS, the following items may be needed when requesting penalty relief:

    • copy of written request and written erroneous advice response relied upon from the IRS;

    • applicable reports of tax adjustments identifying the penalty or addition to tax, and the item(s) relating to the erroneous advice.

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