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Penalty Abatement

Penalty abatement is simply getting tax penalties eliminated, reduced, or removed. Anything more frustrating than IRS penalties for filing taxes late, paying taxes timely, or depositing late? The IRS will agree to penalty abatement under certain circumstances.

Taxpayers who are not able to pay their Federal taxes within the IRS’s timeframe are subject to penalties that can be costly if not dealt with appropriately. Many individuals and businesses that have outstanding tax liabilities realize quickly how fast tax liability, penalties, and interest can increase. IRS penalties can include forfeiture of property or even jail time if not taken care of. LifeCycle Tax and Wealth Management has professionals to help individuals and businesses figure out the best path to getting penalties abated.

Two common forms of penalty abatement include reasonable cause and first-time abatement.

Reasonable Cause

When a taxpayer is trying to get IRS penalty relief due to reasonable cause, the taxpayer must demonstrate that they exercised care and prudence in determining the tax liabilities. The IRS will typically review four categories:

  • Reason for lack of compliance to ensure that dates and explanations clearly correspond with events on which penalties are based
  • The taxpayer’s compliance history for payment matters and overall compliance history to determine how many instances of noncompliance have occurred in the past
  • The length of time between the event cited as reason for noncompliance and subsequent compliance is considered
  • If there were circumstances out of the taxpayer’s control that resulted in the tax liability

A few common events that prove reasonable cause include:

  • Death, serious illness, or unavoidable absence of the taxpayer or immediate family
  • Individuals with an undue hardship if proven that taxpayer would have financial loss if required to pay
  • Fire, casualty, natural disaster, or other disturbance
  • Ignorance of the law constitutes reasonable cause in very limited situations

First-Time Penalty Abatement

Taxpayers miss deadlines occasionally due to unforeseen circumstances, neglect, or potentially forgetting. The IRS follows the Internal Revenue Code strictly which causes penalties to be enforced for failure to file, failure to pay taxes, or failure to make a federal tax deposit timely. Administrative relief is available if taxpayers meet certain criteria. LifeCycle Tax and Wealth Management has experienced professionals to help review if taxpayers qualify for first-time abatement.

The taxpayer needs to show that either they were not required to file a return in past years, or the taxpayer did not incur any significant penalties for the three tax years prior to the imposed penalty. This will not include estimated tax penalties as they are not considered prior penalties. The taxpayer’s request for abatement should not be rejected due to penalties assessed more than three years prior to the tax year of penalties, or in the future. The taxpayer also needs to show that they either filed their tax return that is due in current year or filed an extension of time to file the return. The last step is the taxpayer must show that they plan to pay or have paid any taxes due.

A penalty assessed for failure to pay taxes will accrue until the taxes are paid in full which is why it makes the most sense to wait until the taxes owed are fully paid before requesting relief. The longer the unpaid balance remains on the taxpayer’s account, the larger the balance will continue to grow until the balance is paid in full. When the IRS agrees to abate a taxpayer’s penalties the IRS will reduce or remove interest charged on the penalties.

In addition to these common categories, a taxpayer may be able to establish reasonable cause for a number of additional reasons by demonstrating that they exercised care and prudence but was unable to comply.

Call our office today to see if you qualify for penalty abatement and to make sure a convincing argument is being made to the IRS regarding the penalties. LifeCycle Tax and Wealth Management understands the different situations that will qualify a taxpayer for penalty abatement. To learn more or come in for a free consultation, contact us at 850-465-3075 or