Maybe you didn’t file your tax return on time, or perhaps your check to the IRS bounced. It feels bad when you make an error with your taxes, and the IRS doesn’t make it any easier when it penalizes you for a mistake.
Common reasons for incurring a tax penalty include:
- Failing to file your tax return on time (or at all)
- Failing to pay your tax bill on time
- Income adjustments
- Failing to deposit taxes as required
- Failing to report foreign bank accounts and assets
It’s not much consolation, but tax penalties often start out small. They can be a small percentage of your tax bill, but for some people even that amount could be more than they’re prepared (or able) to afford right now. To make matters worse, tax penalties can balloon way out of proportion as time goes on and can cost hundreds, thousands, or much more than they began as.
For example: A penalty resulting from a failure to file your tax return on time will start out at 5 percent of your tax bill. Each month you return is tardy, the IRS will add another 5 percent to the penalty for up to five months. That means in a worst-case scenario, you’re probably owing an additional 25 percent of your tax bill to the IRS, which it will do everything to collect – including liens and levies.
That’s why if you’ve been hit with a punitive tax fee, it’s time to reach out to an attorney who can help you with IRS penalty abatement.
What Is Penalty Abatement?
Penalty abatement is basically the IRS doing the unthinkable: forgiving you for making a mistake with your taxes by reducing or eliminating penalties. At the end of the day, even the seemingly most cold and uncaring entity in the U.S. government is run by people who understand that you probably made a mistake that doesn’t deserve punishment (this time).
Also often referred to as penalty relief – but not to be confused with tax relief – penalty abatement is offered under three circumstances: reasonable cause, first-time abatement/administrative waiver, and statutory exception.
Reasonable Cause Penalty Relief
Life happens, and sometimes the events that make up life cause us to fail when it comes to our federal tax obligations. In these circumstances, the IRS is willing to mitigate tax penalties when something beyond your control is the reason behind your error or failure to meet a requirement.
Common reasons the IRS will acknowledge to abate your penalty include:
- Natural disasters (fire, flood, hurricanes, tornadoes, etc.)
- Inability to acquire needed records
- Incapacitation from injury or a serious illness
Reasonable cause isn’t limited to these four options, though. If you can make a convincing argument that you attempted to fulfill your obligations but were unable to do so, the IRS is willing to consider penalty relief.
It’s important to note here that not having enough liquid assets to afford your tax bill will suffice if you’re hit with a failure-to-file penalty, but might be considered if you incurred a failure-to-pay penalty.
First-Time Penalty Abatement & Other Administrative Relief
The IRS can relieve you from the burden of a penalty under its rules for First-Time Penalty Abatement, although the scope of applicable penalties is limited. Currently, you may only be able to see administrative relief for penalties resulting from failing to file a tax return on time, failing to pay your full tax bill on time, and failing to deposit taxes when due.
Additionally, the following must be true of your situation:
- You weren’t required to file a tax return or you have no other penalties for three tax years prior to the year you incurred a penalty you’re seeking to abate
- All currently required tax returns are filed, or an extension is filed for
- You have paid your tax bill or have made proper arrangements to do so
In circumstances where you received “incorrect oral advice from the IRS,” as the Service puts it, you can also challenge your penalty by means of administrative relief.
Statutory Exception Penalty Relief
Although uncommon and requiring clear and detailed proof, you can eliminate a penalty if you got it after following the IRS’ own written instructions. Statutory exception to a penalty can be granted when you feel you were hit with an IRS penalty as a result of written advice given to you by the IRS itself.
A successful attempt at this mode of tax relief requires the following:
- Your written request for advice from the IRS
- The erroneous advice written by the IRS that you used when you incurred a penalty
- The report of tax adjustments that shows the penalty or addition to your taxes you suffered (if any such report exists) as result of the bad advice.
Tax law might also provide an out from underneath a tax penalty, which can be explored by reviewing the Internal Revenue Code.
How to Fight for IRS Penalty Relief
If the IRS hit you with a penalty you think can or should be abated, get help from an experienced tax attorney. At Damiens Law Firm, PLLC, we have nearly a decade of experience helping clients like you reach favorable outcomes regarding their tax matters of all kinds.
If you need help, contact us online or call (601) 202-9788 to reach out to request a complimentary consultation.