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penalty abatement

What is Penalty Abatement?

October 20, 2014

Owing tax debt to the IRS is a headache enough. Penalties make resolving a tax debt seem like fighting an uphill battle.

A tax debt that might have been paid off with a bonus or an extra job during the holiday season can suddenly seem impossible to ever pay back when the following is added onto them:

  • Failure-to-File Penalties ranging from 5% to 25% of the tax debt of that particular tax return
  • Failure-to-Pay Penalties ranging from 5% to 25% of the tax debt of that particular tax return
  • Penalties for understatement of taxes owed up to 20% of amount understated

These are just a few of the very common penalties people may experience from the IRS. Reactions to the daunting amounts before them range from simply wanting to hide to considering other actions, such as an Offer in Compromise. Regardless of a person’s ability to pay, if he or she qualifies for penalty abatement, this is an option that can be explored to reduce the liability. Penalty abatement is as straightforward as it sounds. A taxpayer may qualify to get some or all of the penalties owed on their tax debt removed or reduced if they are deemed a worthy cause.

All penalty abatement requests are processed through a subjective IRS employee review. The employee considers whether the taxpayer meets certain factors that generally would qualify them for penalty abatement.

A few of these factors are:

  • Tragic circumstances, such as death or illness beyond the taxpayer’s control
  • Natural disasters, acts of God, casualties, and thefts
  • Hardship cases
  • Evidence of written advice from IRS that either caused the tax debt or contributed to not filing, paying with, or understating on a tax return

In order to file for penalty abatement, a taxpayer needs to complete and send in a Form 843 along with a compelling written statement detailing what factors the IRS should consider in your case. It also is a good idea to include as much supporting paperwork and evidence as possible. If a taxpayer has filed for penalty abatement and been denied, they can always file an appeal. This is not recommended, however, unless they have new information or evidence to improve their case. In many situations, filing an appeal does little more than delay a resolution for the taxpayer.

Not everyone will qualify for penalty abatement. It is also not in everyone’s best interest or is the sole solution that should be pursued. It is often in a person’s best interest to talk to a reputable tax professional to see what they may qualify for and to figure out the best course of action regarding a tax debt. A tax professional has an extensive understanding of tax law to help create the best tax resolution plan. In addition to this, these individuals also have a great deal of experience dealing with the IRS expediently and favorably.