You can often get IRS penalty relief just by asking. The IRS will waive many penalties if you haven’t had a problem with your taxes before. You may also qualify for a penalty abatement if you’re in an unusual situation that reduces your fault for the tax problem.
What does penalty abatement mean?
You may hear penalty relief and penalty abatement used interchangeably. Penalty abatement means to remove the penalties. In this context, they’re penalties that you actually owed rather than penalties that you challenged successfully. You can think of it like a judge giving you a lesser sentence or reducing your traffic ticket.
What IRS penalty relief options are available?
You may qualify for one or more of the following programs depending on your IRS payment history and the tax issue.
IRS First-Time Penalty Relief
The IRS first-time penalty relief 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, you will get approval for your IRS tax penalty abatement request as long as you meet the qualifications. If you have already paid the penalties, you can request a refund.
IRS Penalty Relief Due to Reasonable Cause
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.
Example 3: You were overly aggressive in your business deductions due to bad advice from your tax professional and the IRS imposed a negligence penalty or substantial understatement penalty. If you explain to the IRS why you believed you could rely on the tax pro’s advice in good faith, how you discovered the problem, and how you’re fixing it going forward, you may qualify for reasonable cause penalty relief.
IRS Fresh Start Penalty Relief
If you’re struggling financially, you may be eligible for the IRS Fresh Start program. The purpose of this program is to help taxpayers get out of tax debt by providing easier access to existing IRS penalty relief options. You can think of this program as almost like a bankruptcy but only for your taxes.
You will generally qualify if you meet the following requirements:
- You must owe less than $50,000.
- You must earn less than $100,00 as a single filer or $200,000 as a joint filer.
- If you’re self-employed, you must prove a 25% drop in income.
The primary purpose of the Fresh Start program is to make it easier for taxpayers to get an offer in compromise. An offer in compromise lets you settle your tax debt for less than what you owe. You make a lump sum payment to cover your outstanding taxes due, penalties, and interest, and the IRS forgives the rest.
If you can’t qualify for an offer in compromise, you may be able to get a payment plan or take advantage of the other penalty relief options described above. If you don’t have any money to pay at all, you may be able to stop IRS collections by requesting currently not collectible status.
IRS Form 5500 EZ Penalty Relief Program
If you’re an independent contractor or own a small business, you may be required to file an annual report for your small business retirement plan. The penalties can be up to $150,000 per form at a rate of up to $250 per day late.
You may be eligible for the IRS Form 5500 EZ Penalty Relief Program if you have a one-participant plan covering a 100% owner or partnership. “One-participant” means you, your spouse, and no one else.
You can apply by filing your delinquent 5500 EZ form(s) and paying a fee of $500 per return. If you failed to file multiple returns for a single plan, the fee caps at $1,500 per plan.
How can you request IRS 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.
Does the IRS have a debt forgiveness program?
While the IRS may remove your penalties, it generally won’t forgive your tax debt. You’ll still need to pay any taxes you owe.