The last thing any business owner needs is to deal with penalties from the Internal Revenue Service (IRS). For some, it can be overwhelming, especially for those who may owe thousands or even hundreds of millions of dollars in taxes. Even if you file your taxes on time, penalties can build up because of missed filing deadlines and errors. Missing payments because of a financial issue is even more stressful—and these penalties can add up quickly.
What is Penalty Abatement?
The IRS assesses penalties for filing and/or paying late taxes. Some businesses can obtain an administrative waiver to remove certain penalties as long as they meet certain conditions. The first-time penalty abatement is the most common waiver for businesses and individuals.
While the terms ‘penalty abatement’ and ‘penalty relief’ are often used interchangeably, there is a difference.
- Penalty Abatement: A reduction or the elimination of a penalty that the IRS assessed against you.
- Penalty Relief: This term includes various forms of assistance by the IRS to reduce or eliminate penalties. Penalty relief includes penalty abatement and other forms of relief, including adjustments, penalty waivers, and offers in compromise.
Common Types of Penalties that May be Abated
You can use the IRS penalty abatement to remove certain penalties, including:
- Failing to file tax returns, partnership returns, and S Corporation returns.
- Failing to pay when the tax you show on your return is not paid by the due date.
- Failing to pay when the tax was required to be shown on the return but wasn’t, and that tax was not paid by the due date.
- Failing to deposit the correct amount in the required time period or by the required method of filing.
Who Qualifies for Penalty Abatement?
A tax lawyer can help determine whether you qualify for penalty abatement. The general qualifications to remove or reduce IRS penalties include:
- Your tax compliance history is good.
- You filed the same type of return for the past three years prior to receiving the penalty.
- You did not receive penalties during the prior three years.
- If you received a penalty, it was removed for an acceptable reason other than the first-time abatement.
- You have fewer than four penalty waivers in the past three years.
You can’t apply first-time abatement to an event-based filing requirement, a return with the Daily Delinquency Penalty or when information is dependent on another filing. Additionally, you must have a good reason to ask the IRS to remove or reduce a penalty. Some reasonable causes may include:
- Serious illness
- Natural disaster
- Erroneous advice from the IRS
Some statutory exceptions are automatically granted. In most cases, these exceptions are when you were not able to file or pay taxes due to circumstances out of your control.
If the IRS errs or causes a delay that causes you to fail to meet your tax obligation, the IRS must automatically remove penalties. This includes incorrect written advice from the IRS that causes delays.
Additionally, in certain military service conditions, such as serving in a combat zone or being affected by military or terrorist actions, the IRS may remove penalties during the time you served.
Finally, if the President declares the area you live in a natural disaster, the IRS can remove penalties for late payment and / or late filing.
The Penalty Abatement Process
To request penalty abatement:
- Check your eligibility based on the type of penalty the IRS assessed.
- Gather documentation that supports your eligibility, such as medical records, letters, and financial statements.
- Submit a written request via Form 843 or a letter.
- Submit the abatement request within three years from the original filing date of the return or within two years of the date you paid the tax, whichever is later.
The request for abatement is for income tax, estate tax, gift tax and certain excise taxes. You can request penalty relief on foreign taxes as well. The IRS will not remove penalties for not paying or filing employment taxes on time. The delay or error must have happened after the IRS contacted you in writing about a payment, underpayment, or an examination. The IRS reviews abatement requests on a case-by-case basis.
How the IRS Reviews Penalty Abatement
Once the IRS receives your penalty abatement request, the agency reviews your claim, including your supporting documentation. It can take anywhere from several weeks to several months for the IRS to complete its review. The length of time depends on the complexity of the case and—of course—the number of cases the IRS has.
Once the IRS completes its review, it will notify you of its decision. If the IRS approves your penalty abatement request, it will forward instructions for adjusting your account. If it denies your request, you have the option to file an appeal.
Follow up with the IRS frequently during the review process. By calling, you may learn that the agency needs additional documentation sooner than if it were to send you a letter. It’s an “easy” way to speed up your case. Retaining a tax lawyer can also help speed up your case.
Appeals and Further Actions
If the IRS denies your penalty abatement request, you can appeal its decision. In most cases, you have 30 days from the date of the rejection letter to file an appeal with the Independent Office of Appeals. You can find the specific deadline in your rejection letter.
You can file an appeal only if you meet all of the following:
- You received a letter that stated you failed to file or failed to pay a penalty.
- You requested in writing that the IRS remove the penalty.
- The IRS denied your request.
- You received a letter denying your request.
During the appeal, penalties continue to build up. While some cases are reviewed on a first-come, first-served basis, many are prioritized according to statutory deadlines and whether the case is already in court. Be sure to understand the specific details of your situation, including any relevant deadlines, so you can effectively discuss your case with the appeals board.
If the appeal fails, your next step is to file a case with the United States District Court or the United States Court of Federal Claims. You must pay the penalties prior to filing with the court. You can request installment payments or an offer in compromise should your appeal fail and you decide you do not want to proceed to the courts.
Falling Behind on IRS Taxes? Contact Kundra & Associates, PC
Understanding the penalty abatement process and the appeals process can reduce your anxiety when dealing with the IRS and the appeals process. Pursuing penalty abatement can significantly reduce your tax burden or, in some cases, eliminate the penalties. If you are facing IRS penalties, contact Kundra & Associates, PC, today for a consultation.
