Requirements & Reasons for Penalty Abatement

penalty abatement requirementsIf an individual meets the requirements of the IRS then it is likely for them to get most or all of the penalties canceled, it is very unlikely for them to get interest canceled though. Interest can only be canceled if it was erroneously applied by the IRS or it was the IRS’s fault for lengthy delays that caused extra interest to accrue. The IRS will accepted many different reasons for a taxpayer to abate their penalties. There is really no set formula for penalty abatement and the IRS handles it on a case by case basis. The most common reason that penalties are abated are for “reasonable cause”, which really can be any reason as long as the individual can convince the IRS that their reason was a legitimate reason for not paying or filing taxes. The IRS generally follows the rule that penalty abatement should be granted when “the taxpayer exercises ordinary business care and prudence” in their handling of their taxes.

What the IRS Considers Reasonable Cause?

Reasonable cause really is any excuse that you can prove to the prove to the IRS is a completely legitimate excuse for not being able to pay your taxes on time or file. This reason typically is something that is beyond the control of the taxpayer. The IRS also requires that the taxpayer would have taken steps to counter the events that cause them to not file, but there really was no way for them to do so. Below are some common examples that the IRS provides for considering individuals for penalty abatement.

  • Death (typically a family member or someone very close to the taxpayer)
  • Unavoidable absence of the taxpayer (e.g: in rehab, in prison, held hostage in another country)
  • Destruction of the taxpayer’s place of records (e.g: fire, flood or any other casualty)
  • Taxpayer’s ability to make deposits or payment had been materially impaired by civil disturbances (e.g: divorce)
  • Taxpayer’s was unable to determine amount of deposit of tax for reasons beyond their control (unable to gather records for some reason)
  • Incorrect advice from a tax professional (need to be able to show they are considered competent and trusted and that you provided correct information)
  • Bad advice received directly from the IRS (over the phone, in writing or in person)
  • An error was made but you are able to show it occurred when acting with “ordinary business care and prudence”
  • Other (reasons are not limited, needs to be proven the taxpayer “exercised ordinary business care and prudence” and was still not able to pay or file taxes on time

If the taxpayer does fit into one of the reasons above, the IRS will still look deeper into the situation that caused the individual to not comply with tax laws. Here are some more questions IRS agents typically follow to make a determination about whether the individual should receive penalty abatement.

  1. What were the circumstances of the situation that caused your problem? Why did these circumstances keep you from complying with tax laws
  2. Does the taxpayer have a history of paying late? (If the taxpayer has a history of being delinquent, their chances of receiving settlement go down dramatically)
  3. How were other financial problems handling during the time of the problems?
  4. Did the dates of the problem that occurred correlate to the time of the tax filing deadline or tax due date?
  5. Was the situation that occurred anticipated? How beyond control of the taxpayer were the circumstances?
  6. How strong is your support? Is there any third party documentation? Doctors notices? Hospital bills? News of abduction?

The requirements for penalty abatement are more open than almost all other types of tax debt settlements. The IRS will put an actual face on your case instead of a computer and it can be much easier to attain than other types of settlements. The general rule of thumb for penalty abatement to be accepted is whether or not the events that prevented the taxpayer from being compliant with tax laws were beyond their control. After you have determined you are a likely candidate to receive this type of relief, please follow the detailed filing instructions for this type of relief. It is recommended that you work with a tax professional or tax relief service that specializes in helping individuals achieve penalty abatement.