The IRS charges a penalty to encourage people to follow tax obligations.
There are millions of penalties charged that make up billions of dollars.
People can avert these situations by asking for relief from the law.
It is important for the self-employed and small businesses to ask for penalty relief.
As a result, this can save thousands of dollars.
And believe it or not, the Internal Revenue Code has nearly 150 penalties. However, the most common penalties make up 74% of the total penalties.
Tax Department can Decline the Following Common Penalties
- Reasonable Cause
People need to provide a realistic cause for tax aversion under this type of penalty.
Under this, the person has to present a reasonable cause for filing the returns late.
You need to show that you exercise ordinary business care and that you were not able to comply with certain tax obligations.
If this is you, then you have to present the notion that the non-compliance was not due to willful neglect on your part.
While presenting a Reasonable Cause verdict, you must be sure that IRS considers all the circumstances.
If you are getting an abatement denial letter that does not address your request properly, then you must request for “appeal of the determination.”
- Statutory Exception
The person needs to explain the specific exclusion of the penalty.
This uncommon penalty can be easily explained to the IRS.
The explanation is provided mostly at the time of tax filing. For example – it includes combat zone or disaster relief.
- First Time Penalty Abatement (FTA)
IRS renders administrative relief under certain conditions to small businesses and the self-employed. FTA is a widely used administrative waiver.
The First Time Penalty can be used to abate:
Failure to pay taxes
Failure to file the return
Failure to deposit penalties for one tax period (one should possess a clean compliance history for the past three years)
People who have received penalties on Form 1040, Form 1120, Pass-through Entities and Payroll use the FTA.
This is the easiest penalty relief option as one can request just by calling the toll-free number of IRS.
If you have received any of the above penalties notice, then make sure to check and see if you can receive tax relief.
If you can’t get the result you want, then you can always have a tax expert assist you.
This can lead to a reduction of penalties by the IRS.
Qualifying for Three Types of Penalty Reliefs
Small business owners and self-employed people qualify for penalty relief under a few situations.
Here are the three penalty reliefs:
Relief 1: Penalty Relief due to Reasonable Cause
If it is revealed that the person showed due care in exercising the prudence care for their business to meet the tax obligations but were unable to do so because of unavoidable circumstances, then you may receive penalty relief due to reasonable cause.
Situations the IRS may consider include:
- Inability to obtain the tax records
- Fire or casualty
- A natural disaster or other natural disturbances
- Death or serious illness
- Unavoidable reasons for the absence of the taxpayer or any of their family member
It is worth noting that the lack of funds should NOT be the reason to pay the tax amount.
However, lack of funds can become a lack of criteria to pay the penalty under the reasonable cause.
Here are some facts that can establish a Reasonable Cause
- What facts prevented you from filing your tax return?
- What circumstances lead to not paying your taxes timely?
- What happened and when? (which lead to non-filing of the returns)
- How did a few circumstances lead to the non-filing of the taxes or perform your day-to-day responsibilities?
- If it’s 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 the circumstances of the person changed what steps did you take to pay or file the tax returns?
Additional Causes to Prove the Reasonable Cause Situation
In the case that 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 to help you.
- Do you possess any history of paying taxes late? If so, then your chances of receiving the penalty relief will go down dramatically.
- How the person handled other financial bills at that time or situation?
- Was this condition expected at that time?
- Do your dates of issue of penalty matches the date of tax payment due dates or filing due dates?
- How strong is your relief support? Does the party possess any third-party documents? It may include a doctor’s notice, hospital bill or kind of unavoidable circumstances.
- Was the situation out of your control? Do you have any control over those situations?
It is advisable to work with an experienced tax relief professional to take help in the penalty abatement issues.
Under Reasonable Cause penalty relief, the person needs to present the following documents:
- Documents regarding the natural disaster or any other event that caused the tax compliance or averted the person from filing the return
- Hospital or any court records regarding the delay
- Letter from the physician to state about the incapacitation or illness by stating the start and end dates
If, in any case, you see any problems with your notice, then you can call the IRS toll-free numbers and resolve the issue stated on the notice. You also can call toll-free numbers for receiving penalty relief under the Reasonable Cause.
If a person feels that, they possess the necessary documentation, then they can fax or send an e-mail to IRS.
The Interest relief is also given if a person is provided penalty relief under the Reasonable Cause.
If the unpaid tax amount is still shown in your account, then the interest will keep on accruing until the amount is fully paid.
Relief 2: Penalty Relief Due to First-Time Penalty Abatement (FTA) or any Administrative Waiver
The IRS provides an administrative waiver that is otherwise eligible under the FTA or First-Time Penalty Abatement policy.
The person can get administrative relief from the penalties for the following reasons:
- Fail to file taxes on time
- Fail to file the returns
- Pay or deposit taxes on time
The FTA is provided if the following conditions deem true.
- The person filed all the current returns or extensions of time to file a return is being filed.
- One does not have to file any previous returns. Here the person does not possess any penalties for the previous three tax years. One must note these years must be before the tax year in which you have received a penalty.
- The person has paid or arranging for paying the tax dues.
Under FTA, the failure to pay the tax penalty will accrue until the tax is paid in full.
It will prove advantageous to pay the taxes completely before filing the request for penalty relief under the First Time Abatement policy.
In the case of administrative relief, if the person receives incorrect oral advice from the IRS, then they become eligible for this relief.
Qualification for FTA Waiver
- A person has filed an extension for all the valid returns to be filed. They must not get any outstanding requests for the returns from IRS.
- You must not have any prior taxation penalties. One must only have an estimated tax penalty for the following year. If, in any case, you have received Reasonable Cause in the past, then also you are eligible for FTA.
- If you have paid or arranged the tax dues to be paid in installments as long as these payments stand current.
You may be able to receive the abatement of certain penalties for the single tax period only.
Here, individual taxpayers can request FTA of failure-to-pay or failure-to-file a penalty.
The business taxpayers can ask for the penalty relief if they fail to deposit payroll taxes.
How can you Request the FTA Waiver?
If you are a self-employed or small-business owner, then you become eligible for FTA waiver if the notice sent to you is not correct.
You will not be penalized if the information supplied to you is incorrect.
You can also call the toll-free number of the IRS to resolve the issue on the notice.
This will help you to know if you are eligible for the FTA or administrative waiver.
If the penalty is too high to abate through the call, then you can always try writing a letter to IRS.
If the IRS is abating the penalty on the call, then you must ask for the written proof as well.
In case, your call does not go through on the toll-free number, then you can drop an e-mail or write a letter to the IRS.
All the necessary details like the name of the taxpayer, his or her identification number, tax period, tax form, penalty type and amount must be cited there.
You must state that the client meets the FTA criterion. The payment compliance must be attached and clean payment history too.
Here the Interest relief will be removed or reduced when the penalty is removed or reduced.
If there is any unpaid balance on your account, then the interest will accrue.
You need to pay the full amount here. The tax return needs to be completed and duly signed.
Relief 3: Penalty Relief received 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.
In a few situations, you need to refer under the statutory exceptions.
If you have received any incorrect advice from the IRS in the written form, then you may qualify for the statutory exception.
In the case of receiving any wrong advice, you will need the following for getting penalty relief:
- The flawed advice from IRS on which the parties relied upon
- The written request put up by you for advice
- If there are any reports about the tax adjustments that identify the wrongly given advice
To get the 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 the relief due to the erroneous written advice rendered by IRS.
If you would like to determine if the penalty charged by IRS is wrong or right, then you can call their toll-free numbers.
However, in any case, if the penalty is correct, you will be asked to e-mail Form No. 843 or the supporting documents.
Under Statutory Exception, the interest is only made available, if there is an unpaid balance in your account.
If you have not paid the balance amount, the interest will go on accruing.
The Interest that is charged on the tax penalty will only be removed or reduced if the same is done with your penalty amount.
The specific exceptions are provided to the people who have served in the combat zones.
This exception will appear under the IRC code Section 7508 under the governmental services.
The exception to the tax penalty will be rendered if in any case:
- No tax liability is shown in the previous year
- The tax amount is less than $1,000
- If you are a newly retired veteran or a disabled person
If you are running a small business or are self-employed, then you may be entitled to receive tax penalty relief if they adhere to the above requirements.
Please leave a comment below letting us know if you have received tax relief with these methods or share how you were able to get the IRS off your back on your own.