You may be charged a penalty for filing your return late, failing to pay on time, or making some other compliance mistake on your taxes.
Tax laws allow many different kinds of tax penalties to be assessed against you or your business, but what they all have in common is that they significantly increase your tax bill! As their penalties and interest keep adding up, many individuals face tax debts that seem to have suddenly doubled or tripled and lament:
“I’d be able to pay off my taxes if they would just get rid of all the penalties!”
The IRS states that it uses penalties to “encourage voluntary compliance” with the federal tax system. However, our tax code and regulations are extremely complex. Some taxpayers are unable to follow the rules despite their best attempts to do so. Many small business owners have so much on their plates, they make mistakes with their taxes without any malicious intent.
The good news is the IRS (as well as most state taxing authorities) allows for penalty relief for taxpayers who may have made a mistake.
The bad news is the IRS tends to do a very poor job of administering these tax relief programs in a fair or consistent manner, especially if the taxpayer is not being assisted by a tax professional such as a CPA or attorney. Understandably, the IRS would rather not waive penalties – it means less money for them! The IRS is also chronically understaffed and does not choose to devote much of its limited resources to those departments that work on taxpayer penalty abatement requests.
As such, successfully obtaining a tax penalty abatement usually requires the assistance of a tax professional who is familiar with the IRS’s various internal offices and administrative procedures.
First Time Penalty Abatement Program
The IRS has a special administrative program called the “First Time Penalty Abatement” or “FTA” policy. You will qualify for this administrative penalty waiver if:
- You did not accrue any penalties in the 3 tax years prior to the tax year in which you received a penalty.
- You have filed all your returns to-date.
- You have paid, or arranged to pay, any tax due.
The best way to confirm you qualify for the FTA is to examine your Account Transcripts to confirm you were not charged with tax penalties for the relevant prior years. You can sometimes request an FTA by phone, but often you will be instructed to submit your request in writing. Our tax attorneys can ensure you correctly submit your request for an FTA, and, importantly, confirm that you qualify for the program.
Tax penalties can be abated or removed if you can show the IRS (or state/local taxing authority) that your delinquency was due to “reasonable cause”. To do this, you must prove that you exercised “ordinary care and prudence” in preparing your return or determining what you owe, and when/how to pay it but nevertheless were unable to meet the legal requirements due to circumstances beyond your control.
Major illness, death, and natural disasters are surefire “circumstances beyond your control” that will allow for penalty abatement. Sometimes, a business’s severe economic distress can also justify penalty abatement with the IRS, but only if the facts and circumstances behind the situation are presented carefully.
Generally, the IRS and other taxing authorities require you to meet a very high burden under the reasonable cause standard before they will waive your penalties. Undoubtedly, the IRS has heard every excuse under the sun!
Importantly, if you try to blame your tax problems on a bookkeeper, accountant, office manager, or any other kind of third party who you relied upon on to help with your taxes, this will almost never be “reasonable cause”. The IRS holds you, the taxpayer, responsible for your own tax compliance. Meeting your tax obligations is a “nondelegable duty”!
At the Law Offices of Daniel T. Goodwin, our tax resolution team has had great success removing tax penalties for our clients. Please contact us if you have a question about your tax case or need assistance preparing a formal request for abatement of penalties with the IRS, or a state or local tax authority.