IRS Penalty Abatement – How Does It Work?

It is never fun to receive a letter from IRS, especially one that says you are being assessed penalties due to filing late, paying your taxes late, or understating income on your tax return!  In many cases taxpayers are fearful of additional consequences so they just pay what is owed, but it is important to be aware that sometimes IRS is willing to waive certain penalties, depending on the circumstances.  With that said, there are some important items to be aware of as far as how to qualify and what to do if you find yourself in such a situation.

How Do I Qualify?

Generally, to qualify for penalty abatement, you will need to demonstrate to IRS that you have “reasonable cause” for whatever triggered the penalty assessment.  There are some standard reasons within the IRS guidelines that will, in most cases, qualify you for penalty abatement. These include:

  • Reliance on a tax professional
  • Inability to obtain records
  • Medical illness (personal or family member)
  • Natural disaster
  • Significant financial hardship
  • Death in the family
  • Other reason which establishes that you used all ordinary business care and prudence to meet your tax obligations but were still unable to do so

You will need to present the appropriate facts and circumstances to IRS in order to prove reasonable cause.  This includes the following:

  • What happened and when?
  • What facts/circumstances prevented you from filing your return or paying your taxes on time?
  • How did the facts and circumstances affect your ability to perform your other day-to-day responsibilities?
  • Once the facts/circumstances changed, what steps did you take to try to get back in compliance/rectify the situation?

What is First-Time IRS Penalty Abatement?

For first-time noncompliant taxpayers, in some cases there may not be any need to provide reasonable cause, because IRS offers a one-time penalty abatement for taxpayers who have stayed compliant and have a clean filing and payment history with IRS.  The idea is that everyone is entitled to one mistake!  This generally applies to failure-to-file, failure-to-pay, or failure-to-deposit penalties, but not to other types like accuracy-related penalties.

Since this is a one-time waiver, if you are requesting penalty abatement for more than one tax year/period, the abatement will generally only apply to the earliest period you are requesting abatement for.  If there is other administrative relief you can request from IRS to get penalties abated, you may want to explore that option instead of using up this one-time waiver, which could be more beneficial in a future situation.

How Do I Request Penalty Abatement?

In some cases, particularly with the First-Time Penalty Abatement, you may be able to request a penalty waiver simply by calling and speaking with an IRS representative.  If the penalty is too high or there are other circumstances that prevent a representative from providing relief over the phone, however, you will need to write a letter explaining the facts/circumstances, and you will want to attach the appropriate documentation as proof.  Be sure to include all relevant information in the request, including name, identification number, tax year/period, tax form, and penalty type/amount.

You will want to mail the letter to the address provided on the IRS notice (or, if no notice, the address where you would usually file your tax returns).  You may also want to consider requesting assistance from a tax professional, to make sure you qualify and are able to communicate a convincing argument to IRS.