Penalty Abatement Overview
If your tax debt is snowballing out of control due to accrued penalties and interest, you can request a penalty abatement by proving there was reasonable cause for filing or paying late.
While a lack of funds, in and of itself, is not considered reasonable cause, the basis for your lack of funds might meet the required criteria.
An Example of Penalty Abatement
When Erica’s husband unexpectedly passed away, there was so much she had to take care of: breaking the news to his friends and family, notifying his employer, contacting the funeral home, ordering his casket… and all of that was on top of processing her own grief.
As she worked through her to-do list, filing her taxes completely slipped her mind, and the IRS hit her with a “failure to file” penalty for 40 percent of the total liability. Erica’s compounding debt was beginning to feel insurmountable.
Unsure of what to do, Erica met with a licensed tax professional at Boxelder Consulting, who determined that her unique situation made her a likely candidate for a penalty abatement. They helped Erica fill out the required paperwork to plead her case, and the IRS responded by removing the penalties.
This reduced Erica’s overall tax debt and made her payments more manageable, releasing her from her financial burden and allowing her to focus on what mattered most.
Penalty Abatement – Rules and Requirements
- In order to qualify for a penalty abatement, the taxpayer must submit Form 843 (Request for Abatement and Refund).
- The taxpayer must prove that they had reasonable cause for filing or paying late. The most common situations that fall under this category include
- Death or Illness — If the taxpayer has recently lost a loved one, or is currently battling a serious illness themself, the IRS will take this into account as reasonable cause. This must be involving a close family member; the death or illness of unrelated friends and acquaintances is not a sufficient enough cause.
- Fire, Casualty, or Natural Disaster — If the taxpayer was hit by a house fire or lives in an area that was severely damaged by a natural disaster (hurricane, tornado, flood, riot, etc.), they have reasonable cause to qualify for a penalty abatement.
- Major Life Disruption — The IRS defines a major life disruption as any unforeseen event that causes an extreme financial disturbance for the taxpayer. Major life disruptions include, but are not limited to: incarceration, separation or divorce, a lengthy period of unemployment.
- IRS Error — Believe it or not, the IRS is known to make mistakes from time to time. If a taxpayer’s liability is the result of an IRS error, they may use that as reasonable cause to apply for a penalty abatement. The same goes if the IRS is responsible for unnecessary delays during the taxpayer’s assessment.
- Whether or not the taxpayer has reasonable cause, if they have an otherwise clean track record of filing and paying their taxes on time, the IRS might consider a penalty abatement. The First Time Penalty Abatement (FTA) program is designed to make exceptions for first-time offenders.
Benefits of Penalty Abatement
The benefits of a penalty abatement are clear on its face. If the taxpayer qualifies, having their penalty removed could result in significant savings and allow them to focus on paying their principal tax debts.
Our goal at Boxelder Consulting is to find the resolution strategies that provide the best results for you in the shortest amount of time. If you think you might qualify for a penalty abatement, reach out to our team of licensed tax professionals — we can review your case, file the necessary paperwork, and negotiate directly with the IRS on your behalf.