Can reasonable cause penalty abatement help alleviate your tax debt?
The IRS charges penalties if you fail to pay or fail to file your taxes in a timely manner. These penalties apply to individuals, married couples, and also business owners or people who file as self-employed, 1099 contractors.
It is especially important for the self-employed and small businesses to ask for penalty relief, since it can save thousands of dollars. For many business owners, that money means the difference between their business failing or thriving.
Failure to Pay and Failure to File: The Most Common Tax Penalties
The Internal Revenue Code has nearly 150 penalties. However, the most common penalties – failure to pay and failure to file – make up the bulk of all penalties collected.
Fortunately, many business owners and independent contractors can have these penalties waived, which can substantially reduce your past due tax debt. But you need to follow the proper process to request a waiver.
Whatever you do, don’t ignore your tax bills as interest and penalties continue to accrue. Communication is the key. Let’s look at three options business owners and contractors have for penalty abatement.
How to Qualify for Three Types of Penalty Relief
Small business owners and self-employed people qualify for penalty relief under a few situations. If you aren’t sure how to file for penalty abatement, or if you aren’t sure which type of relief is best for you, the professionals at Alleviate Tax can help.
1: Penalty Relief Under Reasonable Cause
If you tried to pay or file your taxes but couldn’t do so because of unavoidable circumstances, you could qualify for reasonable cause penalty abatement.
Situations the IRS may consider include:
- Inability to obtain your tax records
- Fire or casualty
- A natural disaster or other natural disturbances
- Death or serious illness
- Incapacitation
- Unavoidable reasons for the absence of the taxpayer or any of their family member
Here are some questions to answer that can help establish a reasonable cause for failure to pay or failure to file your taxes in a timely manner.
- What prevented you from filing your tax return?
- What circumstances lead to not paying your taxes on time?
- What happened and when? (which lead to non-filing of the returns)
- What circumstances prevented you from filing your taxes or fulfilling other day-to-day business responsibilities?
- In a Corporation, Trust, or Estate, does the affected person, or his or her immediate family member, possesses the sole authority to execute tax filings?
- Once your circumstances changed, what steps did you take to pay or file the tax returns?
Additional Evidence to Prove Reasonable Cause
If you need to provide more proof to the IRS on whether you are eligible for penalty abatement or not, you may want to consider the questions below:
- Do you possess any history of paying taxes late? If so, then your chances of receiving penalty relief drop dramatically.
- How did you handle other bills and financial obligations during the same time period?
- Was this condition expected at that time?
- Do the dates of your issues or circumstances match the date of tax payment due dates or filing due dates?
Required Documents
Additionally, you may need to share third-party documents as support of your condition. These can include hospital bills, doctor’s notices, insurance claims or photos (for a home or business fire), a death certificate, or other evidence of the hardship.
Examples of documents to provide when you file for Reasonable Cause penalty relief include:
- Documents regarding the natural disaster or any other event that prevented the person from filing the return or paying taxes
- Hospital or any court records regarding the delay
- Letter from a physician stating the start and end dates of incapacitation
It’s best to work with an experienced tax relief professional, who knows exactly how to help you file for penalty abatement and the evidence you will need to provide.
The IRS also provides interest relief if you are granted penalty relief under Reasonable Cause. However, if you still owe unpaid taxes, interest will continue to accrue until the debt is paid in full.
2: Penalty Relief Due to First-Time Penalty Abatement (FTA)
You can get administrative relief from penalties for failing to file taxes or failing to pay taxes. You may qualify for first-time penalty abatement if you have not had any penalties for the past three years prior to the year you received a penalty, and you currently have no late or unfiled tax returns.
You may qualify for penalty relief even if you haven’t paid the tax bill due, but penalties will continue to accrue until you pay the bill. It is better to wait to apply for FTA until you have the money to pay your taxes or have negotiated an agreement with the IRS to pay your tax debt over time through an installment agreement.
You can apply for first time abatement by calling the IRS at the number on the top right corner of your tax bill or collection notice or by filling out Form 843, Claim for Refund and Request for Abatement.
The IRS granted automatic penalty relief to 4.7 million taxpayers if they owed taxes for 2020 or 2021 but did not receive a bill.
3: Penalty Relief Due to Statutory Exception
Tax legislation provides penalty relief under a few statutory exceptions. These can be found under the IRC section 6404 (f). You may ask your tax expert to help you.
If the IRS has sent you any incorrect information or advice in written form, you may qualify for penalty relief under the statutory exception.
You will need to submit the following to file for penalty relief under statutory exception:
- The flawed advice provided by the IRS
- The written request put up by you for advice
- Any reports about the tax adjustments that identify the wrongly given advice
To get tax relief under the statutory exception, the person or the tax professional must file Form 843. Form 843 relates to “Claim for Refund and Request for Abatement.”
This form should be filed to request relief due to the erroneous written advice rendered by IRS.
Under Statutory Exception, interest will continue to accrue if you have not paid your tax debt in full.
Conclusion
If you are running a small business or are self-employed, you may be entitled to receive tax penalty relief. You can gain greater control of your financial future by dramatically reducing your tax bill through penalty relief.
The experts at Alleviate Tax are here to help you negotiate with the IRS to reduce your tax debt.
People Also Ask
What are reasonable cause criteria for penalty abatement?
You may qualify for reasonable cause penalty abatement with the IRS if circumstances beyond your control caused you to miss the tax filing or payment deadline. Reasons may include fires, natural disasters, civil disturbances, inability to obtain your tax records, death, serious illness or unavoidable absence of the taxpayer or their immediate family, or system outages preventing timely electronic filing.
What are good reasons to request an abatement of IRS penalties?
You can request an abatement of IRS penalties if circumstances outside your control, such as fire, natural disasters, illness, or system outages prevented timely filing or paying your taxes.
What does penalty abatement mean?
Penalty abatement is a form of tax relief where the IRS will eliminate penalties and interest on the taxes you owe. However, interest and penalties may continue to accrue until you pay your tax debt in full.
How can I get the IRS to waive a penalty?
The IRS may waive a penalty as part of first-time penalty abatement, reasonable cause penalty abatement, or an administrative waiver. You’ll need to file for penalty abatement using Form 843, Claim for Refund and Request for Abatement.
