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IRS Penalty Abatement

Penalty Abatement

It is safe to say that most taxpayers dislike paying penalties, especially when they find them unfair. Internal Revenue Service (IRS) tax liability can double in around four years if you don’t take care of it. This is because penalties and interest accrue year after year. It may be possible to avoid penalties and interest partially or completely through Penalty Abatement. To do this you must convince the IRS that you are not responsible for the penalties and agree to pay at least 75 percent of the tax liability.

For this reason, 12 years ago the IRS created a First Time Penalty Abatement, which allows individual and business taxpayers to remove certain penalties assessed against them for the first time. The IRS is willing to reward compliant taxpayers with this one-time penalty waiver, which can save you hundreds and even thousands of dollars. The policy behind this procedure is to reward compliant taxpayers for having a clean history. Everyone makes a mistake and the IRS understands this life process. Individuals and businesses may request a First Time Penalty Abatement for any failure to pay, failure to file, and failure to deposit penalties.

There are several qualifications for penalty abatement and our team at Allied Tax Advisory Group can determine which would fit your scenario. There are three ways to file for penalty abatement: use the penalty abatement claim form provided by the IRS. Send a written petition to the IRS stating your case and requesting a refund of penalties. Or, request an oral interview to state why you qualify.

To qualify for the FTA waiver, a taxpayer must meet the following criteria:

  • Clean Penalty History: No prior penalties for the three previous years. If you have received reasonable cause relief in the past, you are still eligible for the FTA waiver.
  • Payment Compliance: Must have paid or arranged to pay all taxes due. This can be completed through an installment agreement.
  • Filing Compliance: Must have filed all required returns.

What is a Reasonable Cause?

In general, to meet a reasonable cause waiver, the standard requires that you have exercised “ordinary business judgment and care” in your tax obligations but still failed to comply (Internal Revenue Manual §20.1.1.3.2). For example, you should consider whether the reasons for non-compliance were outside of your control. Or what your compliance history is against the applicable standards. The facts and circumstances should show that you have made a good faith effort to comply but were unable to do so.

If your situation falls into one of these categories for reasonable cause, you can be eligible for the abatement.

Reason 1: Death, Serious Illness, or Unavoidable Absence.

  • You were incarcerated and promptly addressed your tax duties when released.
  • Passing of close and immediate family members.
  • You had a major drug problem, once out of rehab you took address to tax duties.
  • Your spouse became ill and could not file on time due to attending to his/her needs.

Reason 2: Fire, Casualty, Natural Disaster, Other Disturbance.

  • There was a major flood in your area and your home was damaged, you had to take care of the immediate living situation before filing for taxes.
  • Your office caught on fire and destroyed business records needed.
  • Your neighborhood was hit by a natural disaster of some kind.

Reason 3: Unable to Obtain Records.

  • Your employer did not provide your W-2 on time and return was deemed late.

Reason 4: Mistake Was Made.

  • Your tax return was filed but upon realizing a mistake you took the steps to correct it.

Reason 5: Ignorance of the Law.

  • You were unaware you had to file a tax return.

Reason 6: Hardship.

  • If there would be a substantial financial loss if you were to pay your taxes.
  • You filed bankruptcy when taxes were due.

How to Establish Reasonable Cause and Get Penalties Waved

An IRS Penalty Abatement Letter must be used to clearly state the facts of your case. Allied Tax Advisory Group can create a relevant letter to make the answer to your case a clear “yes”. Your IRS penalty abatement letter is broken into four main sections.:

  • Statement of Facts.
  • Statement of Law.
  • Analysis
  • Conclusion
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