There are more than 148 various penalties the IRS can impose against you.
Unfortunately, the IRS can accrue interest and extra penalties on top of the existing liability. These can be such a rising percentage of total unpaid taxes that it is commonly prudent to consider needing the IRS to reduce or remove penalties in most circumstances.
Ways on how to get the penalties removed or reduced
IRS penalties are frequently cut to zero in two ways: you can petition for penalty relief through the IRS’s First-Time Penalty Abatement or ask for penalty relief because of “reasonable cause.”
But now exactly do these options work – what do they mean? Keep reading for a closer look.
First-time penalty abatement
The IRS may waive a first-time penalty abatement or FTA to help alleviate taxpayers’ inability to file, pay, and deposit fines only if they meet the requirements.
The policy of this method is to compensate taxpayers who have a clean due diligence history; everyone is allowed one error.
A taxpayer should then meet the criteria to qualify for the first-time penalty abatement waiver.
- Filing compliance: It requires that all necessary returns be filed (or a reasonable adjustment be filed) and that there be no special pleas for returns from the IRS.
- Payment compliance: All taxes owed must have been arranged or paid to be settled (when payments are current, it could be installment).
- No prior penalties: Other than a possible calculated tax penalty from the previous three years.
It should be noted that, according to IRM 188.8.131.52, Eligibility requirements for relief of penalty, and penalties under an administrative grant, including FTA, is to be regarded and adhered to prior reasonable cause.
Reasonable cause arguments
Reasonable cause is determined by considering all of the relevant facts in your condition. Financial stress, severe illness or death of a family member, inability to acquire records, or poor advice from a tax specialist are just a few examples that may be considered.
The IRS will consider any justification that demonstrates you have used all valuable business services and diligence to fulfill your tax obligations and yet cannot do so.
Financial constraints are not an acceptable excuse for failing to file or pay on time. Nonetheless, your financial circumstances may meet the standards for reasonable cause for the failure-to-pay penalty.
Here is a closer look at 9 secrets for getting tax penalties removed or reduced in you find yourself in a sticky situation…
(1) Serious illness, death, unavoidable absence
It is eligible to direct family members only. After illness or death, the issue has been handled within a reasonable time frame.
Are there any additional obligations, or are only taxes at risk? Life-threatening sickness, surgery, physical/substance abuse, disability, depression, and psychological/emotional anguish are only a few proofs of disease or death in document form.
(2) Casualty from fire and natural disaster
This section is about your compliance steps, or did you cooperate as soon as possible? Hurricanes, tornadoes, earthquakes, floods, riots, and other “urgent situations” are examples of major disasters.
(3) Not able to obtain consideration records
This section includes several questions that you need to answer accurately.
- Why are the records inaccessible?
- What documents do you need to comply with, and why?
- How and when did you realize you didn’t have the correct records?
- What other options did the taxpayer consider to secure the data?
- Why didn’t you assess the data?
- Did you respond quickly after the missing data was provided?
(4) Honest Mistakes done
It will revolve around how and when the taxpayer becomes mindful of the mistake. Did the taxpayer do things to correct the said mistakes?
(5) Erroneous reliance or advice
It relates to taxpayers’ issues that are too complicated or technical. For example, did they not comply because of not having access to their records? It also could be because of the modified tax law that the taxpayer should know.
(6) Oral or written advice from IRS
You must analyze the information to see if the advice given with a direct request was relevant to the factual information in specific requests.
Consider whether the taxpayer genuinely relied on the particular advice, i.e., if the return was submitted before receiving the direction for that specific tax item. The only justification for relying on a tax professional is for technical issues.
(7) Ignorance of tax laws
The IRS will consider the taxpayer’s educational background and whether or not they have previously been involved in a specific form of tax.
Or they have previously been charged, and whether there have been notable legislative changes, reporting obligations, or forms a taxpayer would sensibly not be assumed to be knowledgeable of.
(8) Ordinary Business Care and Prudence
When a taxpayer uses ordinary business care and prudence, the IRS considers the reasonable cause. It exercises the degree of caution that a prudent and reasonable man would practice while still failing to comply.
The most significant factor affecting reasonable cause is the effort of the taxpayer to report accurate tax liability.
As a result, the IRS instructs its officers to examine critical factors while assessing the taxpayer. It covers taxes, the severity of the situation, the tax professional’s expertise, and reliance on tax counsel.
(9) Undue Financial Difficulty
If a taxpayer has been unable to pay their tax due to financial hardship, they may be given an Undue Hardship Penalty waiver in some instances.
This waiver applies equally to taxpayers who’ve already filed their returns on time. However, as with the other penalty grant provisions, it needs the taxpayer to exercise ordinary business care and prudence in preparing for the tax obligation.
To qualify for this waiver, the taxpayer should demonstrate they had the money to pay the tax obligation but had to use them for other reasons caused by unexpected circumstances.
Alternatively, they can show that paying the tax obligation when it was due would have caused them undue hardship. Finally, failure to pay is a consideration if the taxpayer files for bankruptcy before the tax due date.
Carefree Bookkeeping has created this content for informational reference only and does not represent legal advice. The details available are not a proposal to constitute you, nor is it meant to generate, nor does receipt of such knowledge represent an attorney-client partnership.
When dealing with tax concerns we advise you seek counsel about your specific situation from a certified CPA and a tax attorney. We can help recommend either of these for you when/if the need arises.
We hope you find the material insightful and beneficial, and we’d be pleased to discuss with you our firm if you have any questions.
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