If you’ve been hit with a tax penalty, you’re not alone. Every year, millions of taxpayers are assessed fines by the IRS for late filings, late payments, or errors on their returns. The good news? You may be eligible for IRS penalty relief through something called tax penalty abatement.
In this article, we’ll explain what tax penalty abatement is, why penalties happen, the types of IRS penalties, and how you can apply for relief.
Reasons Why People Are Penalized
Each year, millions of Americans are assessed tax penalties. These penalties typically result from:
- Late filing of tax returns
- Late payment of taxes owed
- Failure to deposit payroll taxes on time
- Underpayment of estimated taxes
- Errors or omissions in tax filings
Life events such as illness, job loss, natural disasters, or even simple oversight can lead to missed deadlines or mistakes. The IRS understands that circumstances beyond a taxpayer’s control may cause noncompliance, which is why they offer tax penalty abatement.
Types of IRS Tax Penalties
The IRS enforces a variety of penalties, each tied to different types of noncompliance.
Failure-to-File Penalty
This is one of the most common penalties. If you don’t file your tax return by the due date (including extensions), the IRS assesses a penalty of 5% of the unpaid taxes for each month the return is late, up to 25%.
Failure-to-Pay Penalty
If you file your return but don’t pay your taxes in full by the original due date, the penalty is 0.5% of the unpaid taxes for each month the payment is late, up to 25%.
Estimated Tax Penalty
Self-employed individuals and others who don’t have taxes withheld from their income must make quarterly estimated payments. If these are missed or not enough is paid, an underpayment penalty applies. This is based on the published interest rates for the period when the payment was due.
Failure-to-Deposit Penalty
Businesses that withhold taxes from employee paychecks are required to deposit them promptly. Failure to do so can result in escalating penalties based on how late the deposit is made. The penalty amount starts at 2% of the unpaid deposit (1-5 days late) and goes up to 15% for those receiving payment notices (CP220 or CO504J).
Accuracy-Related Penalty
If you underpay taxes due to negligence or disregard of IRS rules, or substantially understate your income tax, you may be subject to a 20% accuracy-related penalty.
What is Tax Penalty Abatement?
Tax penalty abatement is a process the IRS uses to waive penalties for taxpayers who meet certain criteria. It can save you hundreds – or even thousands – of dollars if you qualify.
There are three main types of IRS penalty relief:
First-Time Penalty Abatement (FTA)
This is the most common form of relief. You may qualify if:
- You have filed all required returns
- You’ve paid or arranged to pay your taxes
- You haven’t been assessed any penalties (except estimated tax penalties) in the past 3 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 Abatement
This applies when you can show that your failure to comply was due to circumstances beyond your control, such as:
- Serious illness or death in the family
- Natural disasters or fires
- Inability to obtain records
- Incorrect advice from a tax professional or the IRS
The IRS evaluates reasonable cause on a case-by-case basis, considering all the facts and circumstances.
Statutory Exception
In limited cases, the IRS may abate penalties if you received written advice from the IRS that turned out to be incorrect, or if the penalty resulted from an IRS processing error.
How to Apply for Penalty Abatement
There are several ways to request IRS penalty relief.
- By phone: For first-time abatement, call the IRS directly. 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.
- By mail: You can submit a written request using IRS Form 843, Claim for Refund and Request for Abatement. Be sure to include detailed explanations and supporting documents. You must submit Form 843 within three (3) years of the filing deadline date or two years of paying your penalty fees.
- 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. You’ll also need to include any relevant documentation to support your claim. Mail the letter to the address on your notice.
- 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.
Final Thoughts
If you’re facing IRS penalties, don’t panic. The IRS understands that life happens, and tax penalty abatement exists to help honest taxpayers get back on track. Whether it’s your first offense or you have a legitimate reason, you may qualify for IRS penalty relief.
Acting quickly can make a big difference in the amount you owe. If you’re unsure how to proceed, consider working with a tax professional who can guide you through the process and handle communication with the IRS on your behalf.