IRS Tax Controversy Series: When will the IRS forgive penalties (penalty abatement)?

If you've been hit with a penalty from the IRS, it can be stressful and overwhelming. However, it's important to know that you may have options for getting some or all of your penalties and interest forgiven. In this article, we'll cover IRS penalty abatement, first time penalty relief, and when the IRS is more likely to forgive penalties and interest on tax debt.

First, let's define some terms. Penalty abatement is the forgiveness or reduction of a penalty that has been assessed by the IRS. First time penalty relief is a program offered by the IRS that allows taxpayers to have certain penalties waived if they have a clean compliance history. And tax debt is the total amount of money that you owe to the IRS, including any penalties and interest.

Now, let's dive into the specifics of penalty abatement and first time penalty relief.

IRS Penalty Abatement

If you believe that you have been unfairly assessed a penalty by the IRS, you may be able to request penalty abatement. There are several reasons why the IRS may consider granting penalty abatement, including:

• Reasonable cause: If you can demonstrate that you had a good reason for not being able to pay your taxes or file your tax return on time, the IRS may consider granting penalty abatement. Examples of reasonable cause include natural disasters, serious illness, or the death of a spouse.

• Administrative waivers: In some cases, the IRS may waive a penalty if it was the result of an error on their part, such as a computer malfunction or a mistake made by an IRS employee.

• Statutory exceptions: There are certain circumstances in which the IRS is required by law to waive a penalty, such as if you are a victim of tax-related identity theft.

To request penalty abatement, you will need to complete Form 843, Claim for Refund and Request for Abatement. You will need to provide a detailed explanation of why you believe you are entitled to penalty abatement, as well as any supporting documentation. It's important to note that the IRS does not have to grant your request for penalty abatement, and they may ask for additional information or clarification before making a decision.

First Time Penalty Relief

If you have a clean compliance history and this is your first time facing a penalty, you may be eligible for first time penalty relief. This program allows taxpayers to have certain penalties waived if they have not had any penalties for the past three years and they have filed all required returns.

To qualify for first time penalty relief, you must meet all of the following criteria:

• You must not have any penalties for the past three tax years.

• You must have filed all required returns.

• You must not have any outstanding tax debt.

• You must not have any pending offers in compromise or installment agreements.

If you meet these criteria, you can request first time penalty relief by contacting the IRS and explaining that you are eligible for the program. It's important to note that first time penalty relief is only available for certain types of penalties, including the failure to file and failure to pay penalties. Other penalties, such as the accuracy-related penalty, are not eligible for first time penalty relief.

When the IRS is More Likely to Forgive Penalties and Interest on Tax Debt

In some cases, the IRS may be more likely to forgive penalties and interest on tax debt if you are able to demonstrate that paying your tax debt would cause you undue hardship. Undue hardship is a difficult standard to meet, but it generally means that paying your tax debt would prevent you from meeting your basic living expenses.

To demonstrate undue hardship, you may need to provide documentation such as proof of income, expenses, and assets. You may also need to complete Form 433-F, Collection Information Statement, which is used by the IRS to gather information about your financial situation.

It's important to note that even if you are able to demonstrate undue hardship, the IRS may still require you to make some type of payment towards your tax debt. However, they may be more flexible in terms of the payment amount and the payment schedule.

Another option for getting penalties and interest forgiven on tax debt is to enter into an offer in compromise (OIC) with the IRS. An OIC is a legal agreement between you and the IRS in which you agree to pay a reduced amount of your tax debt in exchange for the IRS agreeing to forgive the remainder. To be eligible for an OIC, you must be able to demonstrate that you are unable to pay your full tax debt and that the amount you are offering to pay is the most that the IRS can expect to collect within a reasonable period of time.

It's important to note that the IRS does not grant OICs lightly, and they will thoroughly review your financial situation before making a decision. If you are considering an OIC, it's a good idea to work with a Tax Attorney who can help you navigate the process and increase your chances of success.

In conclusion, if you have been hit with penalties from the IRS, it's important to know that you may have options for getting some or all of your penalties and interest forgiven. These options include penalty abatement, first time penalty relief, and demonstrating undue hardship or entering into an offer in compromise. While the IRS does not have to grant your request, it's worth considering these options if you are unable to pay your tax debt in full.

A Tax Attorney at Safeguard Law, PLLC can advocate on your behalf and help you determine if you are eligible for penalty relief. Give us a call today!