Are You Aware That IRS Penalties Can Be Reduced?

Each year the IRS assesses millions of penalties against taxpayers. Most taxpayers are unaware that post-assessment the IRS also abates many of those same penalties. During fiscal year 2013 the IRS assessed 37 million penalties against taxpayers. The IRS later abated about 5 million of those penalties. Most of those abatements occurred because taxpayers or their representatives contested the penalties. It is important for those subject to IRS penalties to know their rights to dispute a penalty assessed by the IRS.

There are over 100 potential penalties that might be asserted against a taxpayer.

The majority of the penalties however: fall into two categories: collection penalties and accuracy related penalties.

The most common collection related penalties are:

  • Late filing up to 25% of the unpaid taxes of the return
  • Late payment up to 25% of the unpaid taxes
  • Late federal tax deposits up to 15% of late deposits

The most common accuracy with related penalties are:

  • Negligence penalty up to 20% of the understated taxes
  • Substantial understatement penalty up to 20% of the understated taxes

For taxpayer subject to IRS penalties the IRS Penalty handbook provides a listing of the IRS’s favorite reasons for reducing penalties.

In considering non-assertion or abatement of penalties the IRS applies a standard of “Reasonable Cause”.

Most people are unaware that the IRS will consider the following as reasons it might reduce a penalty:

  • Death, Serious Illness, or Unavoidable Absence
  • Fire, Casualty, Natural Disaster, or Other Disturbance
  • Unable to Obtain Records
  • Mistake was Made
  • Ignorance of the Law
  • Forgetfulness
  • Statutory Exceptions or Waivers
  • Undue Hardship
  • Written Advice From IRS
  • Oral Advice From IRS
  • Advice from a Tax Advisor
  • Official Disaster Area
  • IRS Error

The taxpayers who have not had a previous delinquency the IRS generally may apply a First Time Abatement Rule upon request by the taxpayer. If taxpayer has not previously been required to file a return or if no prior penalties (except the Estimated Tax Penalty) have been assessed on the same against the same taxpayer. This First-Time Abate (FTA) is an Administrative Waiver. A taxpayer seeking an FTA must request a penalty reduction in writing.

IRS employees reviewing penalties use a computer program known as reasonable cause assistant. In other words the IRS uses artificial intelligence to determine whether to reduce a penalty. Those who specifically reference to a section of the penalty handbook are much more likely to have IRS penalties reduced.

Not all IRS employees are adequately trained in the reasons for reasonable cause.

Those taxpayers referencing the penalty handbook have a much greater chance of success than those who merely submit a statement of facts to support their request for reduced penalties. In other words those who avoid the need for an IRS employee to research reasons for penalty reduction by citing directly to the IRS manual will be much more successful than those who rely upon the IRS to properly research that manual.

To qualify for penalty abatement you must convince the IRS that you should not be held liable for this additional money. Some examples of such reasons that will give you a good chance of receiving penalty abatement include: a serious sickness; a family problem, such as a divorce; the destruction of important tax records; hiring a tax professional who gave you harmful advice; a natural disaster; or long term unemployment. If you have faced any of these issues, you have a higher chance of getting your IRS penalties removed.