IRS penalty relief may help you avoid tax penalties even when you clearly owe them. There are two main arguments you can make.
First-Time Penalty Abatement
The IRS first-time penalty abatement program applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. It does not apply to any other type of penalty.
To qualify for first-time penalty abatement, you must meet three qualifications:
- All returns filed or under a valid extension.
- Must have paid or arranged to pay (e.g. an installment agreement) all tax due.
- No prior penalties within the preceding three years. Exceptions: Estimated tax penalty and penalties relieved for reasonable cause.
In most cases, the IRS will remove the penalties as long as you meet the qualifications. If you have already paid the penalties, you can request a refund.
IRS penalty relief may also be available in situations where penalties would normally apply but you had a good excuse. Common examples include the following.
- Flood, fire, or other disaster.
- Death or serious illness of a family member.
- Records lost or destroyed through disaster or theft.
- Civil disturbances.
- Incorrect information from the IRS.
- Incorrect advice from a tax professional.
Reasonable cause is not a black-and-white issue. You must also explain to the IRS why you were prevented from filing or paying. You also need to do what you can as soon as you can.
Example: You get stuck in a foreign country due to an airline strike right before your filing deadline. If you file within a week or two of when you’re able to return home, the IRS will likely find reasonable cause. IRS penalty relief would likely not apply if you waited for months to file or never filed at all.
Example 2: Your tax records are destroyed in a fire. The IRS will likely find reasonable cause if it takes you a little longer to file or if you no longer have full supporting documentation for every item on your return. The destruction of your tax records is not reasonable cause for not filing at all, because you can use bank records and other information to complete your tax return as best as you are able to.
How to Request Penalty Relief
If you get a notice from the IRS, don’t agree to penalties unless you’re sure they’re valid. Even if you can get relief and don’t actually pay the penalties, it will affect your eligibility for future first-time relief and may influence IRS decisions in future audits.
Most IRS penalty relief requests are done via letter. You may wish to have a tax professional draft this letter for you to ensure that it covers all of the criteria, has sufficient explanations, and contains any needed supporting documentation.