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What Is Tax Penalty Abatement?

The term “abatement” means the ending, reduction, or lessening of something. Tax abatement, however, generally refers to the removal or reduction of taxes. There are several types of tax abatements, including property tax abatement and tax penalty abatement. In this article, we’ll take a look at how these types of tax abatements differ, as well as how to qualify and apply for tax penalty abatement.

Property Tax Abatement vs. Tax Penalty Abatement

Property tax abatements are typically provided through local, state, or federal incentive programs. They are meant to attract individuals and businesses to a specific area by offering to reduce or eliminate property taxes for a period of time. Generally, you must meet certain conditions to get the tax abatement. For example, some cities offer incentive programs to lower-income families.  Others, try to entice business owners into revitalizing a community by offering tax abatements in exchange for new construction or existing property improvements. Property tax abatements can last for a few months, several years, or indefinitely.

Tax penalty abatement is very different. It is not an ongoing benefit and must be requested by the taxpayer after a tax penalty is assessed. The most common penalties eligible for tax abatement are failure-to-file, failure-to-pay, and accuracy-related penalties. The IRS and most states offer penalty abatement, but eligibility and filing requirements for receiving one vary.

Am I Eligible for IRS Penalty Abatement?

Many taxpayers qualify for tax penalty abatement but do not request it. In 2021, nearly 41 million civil penalties were assessed by the IRS, but only 11.3% were abated. The IRS will abate penalties for various reasons, but the two most common types of IRS penalty relief are first-time penalty abatement (FTA) and reasonable cause.

First-Time Penalty Abatement

In 2001, the IRS created FTA to help taxpayers who have a good compliance record receive a reduction or elimination of their failure-to-file, failure-to-pay, or failure-to-deposit penalties. To qualify, you must have:

  1. Filed all required returns or requested an extension.
  2. Paid all taxes due or made payment arrangements with the IRS.
  3. No penalties for the previous three years.

It’s important to note that you can only request FTA for one tax year. If you are requesting penalty abatement for more than one year, you’ll need to request reasonable cause for the subsequent tax years.   

Reasonable Cause

The IRS will consider reducing or eliminating your penalty fees if you can show you used ordinary care and prudence to meet your tax obligations but were still unable to do so. Reasons that may be accepted, include:

  • Natural disasters (fire, flood, hurricane, etc.)
  • Serious illness, incapacitation, or death (including immediate family members)
  • Destruction of records
  • Reliance on a tax professional’s advice
  • Ignorance of tax laws
  • Incarceration

In some cases, you may also have your failure-to-pay penalties reduced or waived if you’re experiencing significant financial hardship. Just keep in mind that you will need to submit sufficient evidence to support your reasonable cause claim.

How to Apply For Tax Penalty Abatement

If you think you may qualify for tax penalty abatement, there are several ways to request relief.

  1. Call the IRS. For smaller penalty amounts (typically $500 or less) and FTA, you may contact the IRS at the number listed on your tax notice. During the call, you’ll need to identify the notice you received and the tax penalty you want reduced/removed. You’ll also need to explain the reasons why you think the IRS should abate it. If the IRS can’t approve your request by phone, you’ll need to submit Form 843, Claim for Refund and Request for Abatement.
  2. File Form 843. If you have paid your penalty in full, file Form 843 and request a refund. Explain why you were unable to meet your tax obligations and attach any documentation you have to support your case. Be sure to submit Form 843 within three (3) years of the filing deadline date or two years of paying your penalty fees.
  3. Send a letter to the IRS. In cases where you are unable to seek tax penalty abatement by phone or you haven’t paid your penalty amount in full, you’ll need to write a letter to the IRS. Provide a copy of your notice, an explanation of why you shouldn’t have to pay the penalty, and include any relevant documentation to support your claim. Mail the letter to the address on your notice.
  4. Seek help from a tax professional. A tax professional can determine if you qualify for tax penalty abatement. If eligible, they’ll contact the IRS on your behalf and request to have penalties reduced or removed. Due to their knowledge of tax codes and experience dealing with the IRS, your chances of penalty relief are typically higher than if you made the request yourself. A tax professional can also assist in the event your abatement request was denied and you need to file an appeal.

If you’re seeking penalty relief and don’t know if you qualify, contact Tax Defense Network. Our team of qualified tax professionals can file your tax penalty abatement request and help you find an affordable solution for your tax problems. Call 855-476-6920 for your free, no-obligation consultation today!