What is a Tax Penalty Abatement?

Taxpayers with unfiled tax returns or unpaid taxes are often hit with the following IRS penalties:

• The failure-to-file penalty, which accrues at 5% of your unpaid taxes per month
• The failure-to-pay penalty, which accrues at 0.5% of your unpaid taxes per month

In addition, you’ll be charged interest each month if you have an unpaid balance. IRS rates are adjusted each quarter, but have been between 3% and 5% in recent years.

When you owe tens of thousands or more in back taxes, these penalties and interest can add a significant amount to your tax burden and make it more difficult to negotiate a tax resolution.  Luckily, you may qualify for a penalty abatement – or simply put, penalty relief.  Certain conditions, however, must be met to qualify.  And there are a few different types of penalty abatement.

First-Time Penalty Abatement

First-time penalty abatement can help you reduce your overall balance owed. If your penalties are abated, any interest charged on those penalties will also be eliminated.

To qualify, you need a clean compliance history for the previous three tax years. You can ask your tax attorney whether you might be eligible for first-time abatement and how much penalty relief you could receive.

Reasonable Cause

Let’s say you’re involved in an accident and have to spend a few months in the hospital recovering. In the meantime, you missed a tax filing deadline and were late sending your tax payment.

In this case, you may be a candidate for penalty abatement due to reasonable cause. Other situations that could qualify include fires, natural disasters, other events that cause your financial records to be lost or destroyed, or the death of an immediate family member.

Statutory Exception

One common statutory exception is used when the IRS gives you bad advice. If you follow advice received from the IRS and receive a tax penalty, you can request penalty abatement under a statutory exception.

Many IRS penalties accrue every month, so getting penalty relief for a full tax year can result in big savings. This reduces the total amount you owe, which can then be paid off in installments or using another tax relief strategy.

Have a tax audit defense question? Contact Venar Ayar.