Every year after the extension due date new clients contact me ready to file their tax return. This is the time we find out extensions were not actually file, and now they have multiple penalties and interest to pay. I get them updated and write a letter to abate penalties.
The IRS isn’t in the business of letting people keep money. Penalty abatement is kind of easy the first time around for most clients. Some people don’t even feel it worth asking for penalty abatement/relief because everything involving the IRS is too complicated and time consuming. This is the part where I push up my glasses and tighten the tie getting ready to handle the hard part on their behalf.
I think taxpayers need to understand why the IRS actually uses penalties. Penalties are supposed to be a deterrent for people who fail to follow the rules and are out of compliance with the US tax code. They are a great way to bring in revenue for a under funded government branch so expect to see them applied whenever possible. The IRS apply millions of penalties to tax payers every year bringing in billions of easy money. Life happens and there are additional options to get penalties removed, or abated, for individuals ans businesses that qualify.
The most common used IRS penalties is the failure to file and failure to pay.
The IRS has over 130 different penalties the can assess. in the Internal Revenue Code, but two penalties make up 75% of all penalties assessed by the Internal Revenue Service.
Failure to pay penalty equals 60% of all penalties.
Failure to file penalty equals approximately 15% of all penalties.
The tax penalties can be disputed by providing an exception when filing your tax return.
Penalties will be removed by the Internal Revenue Service for a few reasons. We normally end up requesting penalty abatement for a statutory exception or reasonable cause.
Statutory exception- Are specific authoritative exclusions to the penalties. Statutory exceptions are rare, but rather easy to make a case for. A statutory exception would be a presidential declared disaster relief.
IRS Fault: If you can prove an error was the result of reliance on IRS advice. We always caution against following an agents advice. We default to the US Tax code and use that. To use the IRS error for a penalty relief is difficult and rarely successful. You need to have documented erroneous advice from the IRS that you reasonably relied on. The IRS doesn’t put tax advice in writing in majority of cases. You can also file penalty abatement based on erroneous verbal advice. Being able to successfully use either argument is not common.
Reasonable cause: providing a valid reason that you couldn’t comply based on your facts and circumstances. This argument normally includes chronic health problems and reliance on a bad tax professional or tax software. Those types of problems can be used under reasonable cause.
To successfully apply for an abatement using a reasonable cause argument for late filing and payment has its own requirements. You must demonstrate that you genuinely tried to comply. Your actions should demonstrate a sense of care. You need to show that your noncompliance was not due to your willful neglect.
IRS agents are also citizens and taxpayers just like you. To successfully prove a reasonable cause, you’ll need to make sure that the IRS knows all of the facts around the circumstances. It can seem unnecessary, but not all situations are the same. Leaving out facts that can clarify your position could result in you receiving a denial letter. If the denial letter fails to address facts crucial to your argument presented earlier. The option to request an appeal of the determination should be explored.
The IRS can provide administrative relief from a penalty under certain conditions. The most widely used relief is the first-time penalty abatement (FTA). FTA can be used to abate your failure to file, failure to pay, and other penalties for a single tax period. You do need to have a good history of filing your returns. You can use first time penalty abatement for your business tax penalties as well. FTA is the easiest of all penalty relief options to get approved. You just have to ask for it. If you need help with the IRS you should contact iIATC Inc for tax resolution services.