The penalties assessed by the IRS for not timely filing a return and for the late payment of the tax can have a devastating effect on a taxpayer’s ability to repay the tax liability. Not only do these penalties add to the principle tax owed but interest also accrues on these penalties.
The IRS however does provide relief in the form of penalty abatement. There are two primary forms of penalty abatement. The first is called First Time Penalty Abatement. Qualifications for First Time Penalty Abatement are determined based on a taxpayer’s prior filing and payment history. The second form of penalty abatement is a reasonable cause penalty abatement.
The IRS will approve a First Time Penalty Abatement request on any tax year in which during the prior three tax years the taxpayer timely filed their returns and full paid the tax prior to the filing deadline. For example, if there were penalties for late filing the return and late payment of the tax assessed to the 2018 balance due, the IRS would automatically abate those penalties under a First Time Penalty Abatement request if in tax year 2015-2017 all returns were filed timely, all taxes paid timely and no penalties assessed.
When a taxpayer is not eligible for First Time Penalty Abatement, they may request penalty abatement based on a reasonable cause. The burden rests with the taxpayer to establish that circumstances gave rise to a reasonable cause for failing to file the return or pay the tax timely or both.
Circumstances that typically give rise to a reasonable cause for filing the return late would be a natural disaster, prolonged illness, divorce or prolonged absence from the United States causing the taxpayer to be either separated from the records necessary to file a return or rendered unable, such as in the case of an illness, to be able to file the return.
Circumstances that typically give rise to a reasonable cause for the late payment of the tax would be a loss of income, especially a period of unemployment, substantial medical expenses or other circumstances that create unexpected expenses that would cause a reasonable person to be unable to pay the tax due.
Requests for penalty abatement are submitted to the IRS using a form 843. On the form 843 the taxpayer indicates the tax period they are requesting the abatement on, the amount of penalty they seek to have abated, the type of penalty and provide any relevant reasonable cause explanation.
If the IRS grants the penalty abatement not only will the total liability be reduced by the amount of the penalty that was abated but additionally the interest that had previously accrued on that penalty would also be abated.
Penalty abatement can have a significant effect on mitigating the total liability a tax payer owes. If you have been assessed any penalties by the IRS please consult a tax practitioner so you can maximize your chances of having those penalties abated.
The tax attorneys at J David Tax Law are experienced at working with the IRS to achieve positive outcomes for our clients.