Ultimate Guide to IRS Penalty Abatements

Being assessed a tax penalty on top of the taxes you owe can greatly increase your total tax liability. The Internal Revenue Service states that it assesses tax penalties to encourage people to voluntarily comply with the tax laws. You are deemed to be voluntarily complaint when you make a good faith effort to meet your tax obligations. However, receiving a tax penalty can make it difficult for you to pay everything you owe. Fortunately, the IRS provides several methods for seeking an abatement of the penalties you might be assessed.

What are IRS penalty abatements?

Penalty abatement is a process through which you can ask the IRS to remove penalties you have been assessed. There are many different types of penalties that can potentially be abated. However, you have to go through the correct process before your tax penalties will be removed.

If you have been assessed a failure to file or a failure to pay penalty, you will have to request abatement to have the penalty removed. The IRS’s computer system automatically assesses these penalties when you file a return late or when you make a payment with a due balance.

Other types of tax penalties are normally assessed during IRS investigations or audits, including the fraud and accuracy penalties. You can request an abatement of a return accuracy penalty after it is assessed, but you might need to undergo special IRS procedures.

The three primary methods of securing tax penalty abatements include administrative waivers or first-time abatements, reasonable cause abatements, and Form 843 abatements. We’ll take a look at each of these processes below.

Administrative waivers/First-time abatements

If you meet the criteria for a first time abatement, the IRS might provide you with administrative relief for certain penalties, including the failure to file, failure to pay, or failure to deposit penalties. The first time abate program is available to you the first time you are assessed one of these types of penalties on one return. However, you must also meet the following specific eligibility guidelines to receive an administrative waiver or first-time abatement:

  • You have filed all required returns or extensions for any returns that are currently due.
  • You have made payment arrangements for any currently do taxes or have paid them.

You will be considered current with your tax return filing if you have either filed all tax returns that are due or have filed extensions for them. You cannot have any missing returns with due dates more than 45 days before the current date. You will not be considered current if you were assessed a penalty through a substitute for a return prepared by the IRS for a missing return you failed to file. If you have a current payment plan and are current with your payments, you will be considered current on your payments.

In addition to the previous eligibility criteria, you must also meet the following criteria to be eligible for a first-time abate waiver:

  • The ending date of the tax period for which you are requesting a penalty abatement is after Dec. 31, 2000.
  • You have not been required to file the same return during the three years before the penalized tax year.
  • If you were required to file the same return during the past three years, you did not have any unreversed penalties other than an estimated tax penalty.
  • If you were required to file the same return in the past three years, you did not have the penalties reversed or manually suppressed.

However, if you are able to show that you were not required to file a return and did comply with the tax law, you should be eligible for the first-time abate of a failure to file penalty.

The first-time abate is a type of administrative penalty relief. It only can be applied to one tax period during which you meet the eligibility criteria. You will not necessarily be eligible for a first-time abatement simply based on the fact that it is your first time asking for relief from an assessed tax penalty.

IRS reasonable cause penalty abatement

If you are not eligible for the first-time abate program but have a good reason for why you should be granted relief, you can request an abatement of your penalty for a reasonable cause. A reasonable cause penalty abatement will only apply to the specific penalty for which you have a reasonable cause for waiver or abatement.

Specific guidelines apply for abatements granted for a reasonable cause. According to the IRS, a reasonable cause penalty abatement will only be granted if you used ordinary care and prudence when determining what your tax obligations were. You must have acted in good faith and cannot have been in noncompliance because of willful neglect.

In general, you may have reasonable cause for a penalty abatement if your conduct was in good faith to justify a penalty abatement. The IRS judges each case individually based on the circumstances, facts, and the evidence you present. The IRS will consider the attempts you made to comply with the tax law after the circumstances changed. In other words, the IRS will review your circumstances to determine whether they prevented you from paying your taxes, filing your return, or otherwise complying with the tax laws.

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Reasonable cause penalty abatements are not available for every type of tax penalty. If you willfully neglected to pay your taxes, file your return, or otherwise comply with your obligations, you will not be eligible for a reasonable cause abatement.

The IRS is going to want a justifiable cause before it will agree to abate your tax penalties. The IRS has listed several circumstances in the Internal Revenue Manual that can be used to challenge your tax penalty. The listed circumstances are not exhaustive, and it may be possible for you to secure a reasonable cause penalty abatement based on a circumstance that is not listed. However, it will likely be more difficult to succeed for a reason that is not listed.

Exercising ordinary prudence and business care

For this circumstance to apply, you must show that you made reasonable efforts to comply with the tax law but were unable to do so because of uncontrollable circumstances. The IRS will consider the following four factors when it determines whether to grant a reasonable cause penalty abatement to you:

  • Your reason for requesting a penalty abatement must be compelling.
  • Your past tax compliance will be weighed.
  • You must have taken a reasonable time to become tax-compliant under your circumstances.
  • Your stated reason for abating your tax penalty must be something that was truly beyond your control.

The IRS will ask for documentation to substantiate your given reason so your claims can be validated.

Death, unavoidable absence, or serious illness

If you suffered a serious illness, an unavoidable absence, or a death in your family that caused you to fail to meet your tax obligations, you may have a good chance of being approved for a reasonable cause penalty abatement. You will need to submit evidence of the following things to the IRS:

  • If you suffered a serious illness, evidence of your condition’s severity
  • If a death in your family caused your non-compliance, evidence of your relationship to the deceased person
  • Date of your loved one’s death
  • Reasons for your unavoidable absence and the dates involved
  • Any other relevant evidence

When you submit a request for a reasonable cause abatement based on death, serious illness, or unavoidable absence, remember that a person will review the circumstances. There is no harm in appealing for sympathy when you make your request for abatement.

Natural disaster, fire, flood, or casualty

If you were late in filing or paying your taxes because of a natural disaster like a tornado, flood, or fire, you should be granted a penalty abatement based on reasonable cause. This is especially true if you lived in a designated disaster area at the time of your noncompliance. The IRS will still review your circumstances to determine whether to grant you relief and will want you to make any payments owed as soon as possible.

Inability to obtain records

If you were unable to file your tax return on time because of your inability to obtain relevant records, you might be granted an abatement of your tax penalty. The IRS will consider whether your failure to obtain the records was reasonable under the circumstances. It will also look at whether you had control of the records.

The IRS prizes return accuracy, so waiting until you are able to obtain all of the necessary documents to file an accurate return might demonstrate your diligence. However, the efforts you made to secure the missing records will be important.

Mistakes

If your penalty resulted because of mistakes you made on your return, you can ask for a reasonable cause penalty abatement. However, making mistakes indicates that you might not have exercised ordinary prudence and care. The IRS will consider the following factors when it decides whether to grant you relief based on this factor:

  • When you became aware of your mistake
  • Whether you did anything to correct your mistake
  • If you delegated the duty to file your taxes to someone else, the relationship between you and the designee
  • Whether any steps you took to fix the mistake were timely
  • Any supporting documentation

It is generally quite difficult to secure an abatement of your penalty based on mistakes.

Bad advice

If you relied on erroneous advice from a tax adviser or the IRS, you can request a reasonable cause penalty abatement. However, you cannot delegate your responsibility for meeting your tax obligations to someone else. If you relied on written or oral advice provided to you by a tax practitioner or the IRS, the agency will also consider whether your noncompliance resulted from tax law changes that you reasonably could not have been aware of or whether you were unable to comply because of a lack of access to your records.

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Ignorance of the law

While ignorance of the law is one of the listed reasons the IRS has for a penalty abatement based on reasonable cause, it rarely works as a standalone claim. You might use this together with other reasons to strengthen your overall claim, however.

If you claim that you were non-compliant based on your ignorance of the law, the IRS will review your educational background and consider whether you have been penalized in the past. It will also consider whether any changes in the law or the required forms might have occurred.

Forgetfulness

While forgetfulness is listed as one of the circumstances for the IRS to consider, the agency notes that it generally will not provide the basis for granting a reasonable cause penalty abatement. Generally, you should avoid this argument.

Undue hardship

Another factor the IRS lists for a reason to potentially abate a tax penalty is undue hardship. To claim undue hardship, you will need to be able to present documentation that you are faced with severe financial hardship. Simply not being able to presently pay what you owe will not be enough. The IRS normally limits abatements for undue hardship based on the following types of situations:

  • The penalty would cause a severe detriment to your personal health because of an inability to pay your medical bills.
  • The penalty would cause you to lose your home.
  • The penalty would cause you to be unable to provide for your minor children.

While undue hardship might apply to failure to pay penalties, the IRS will generally not waive penalties because of undue hardship for failure to file penalties.

Form 843 abatements

If you want to ask for an abatement of penalties or interest that the IRS applied in error, you can do so by filing Form 843. This form must be filed no later than two years after the date you paid the taxes or three years after you filed the return. You must file a separate Form 843 for each erroneously assessed fee for each year. This form can also be used to request a refund of taxes the IRS assessed in error.

You can use Form 843 to abate the following types of things:

  • Erroneously assessed gift or estate taxes
  • Penalties and interest caused by IRS delays or mistakes
  • Penalties resulting from erroneous, written advice given by the IRS
  • Medicare and Social Security taxes that were erroneously withheld

You cannot use Form 843 to amend a filed income tax return to try to claim a refund of lien, offer-in-compromise, or installment agreement fees. You also cannot use it to try to amend a prior return to claim an abatement of FICA taxes, Railroad Retirement taxes, or income tax withholding.

The primary reason for most taxpayers to file a Form 843 occurs when the IRS wrongly assesses taxes that they do not owe together with penalties and interest. If this happened to you, you can file Form 843 to ask the IRS to correct the mistakes and abate the associated tax, penalties, and interest.

You can also file Form 843 if your employer withheld too much Social Security and Medicare taxes and refuses to correct the mistake.

To file Form 843, you will need to input your basic information, including your name, address, relevant tax period, Social Security number, and the type of return you filed. You will also need to write down the Internal Revenue Code section number for any penalty you are requesting an abatement for on the fourth line.

The form asks you to select from one of the following reasons for your request:

  • The IRS’s errors or delays resulted in its assessment of penalties or interest.
  • You received erroneously written guidance from the IRS.
  • You have a reasonable cause other than mistaken advice from the IRS.

You can attach more pages if you need more room to write an explanation about your request. Make sure that you include documentation to support the reasons you provide.

Tax penalties can drastically increase the amount that you owe to the IRS. Depending on your situation, however, it is possible for you to receive a tax penalty abatement to obtain relief. As long as one of the previously mentioned reasons apply to your case, and you have supporting documents to prove your claims, you may be eligible to receive penalty relief. To increase your chances of securing a first time abatement or an IRS reasonable cause penalty abatement, you should talk to an experienced tax law attorney.