Just how forgiving is the IRS?
It’s important to understand if you can get the IRS to agree to forgive the penalties and interest that have been accruing on your tax debt. It’s a valid concern; interest and penalties often times can accumulate rapidly. Mine sure did. I wish I knew about this earlier!
In reality there isn’t a whole lot that can be done to abate penalties and interest. An Offer in Compromise is typically the best way to “abate” the penalties and interest, but you’re not really abating the penalties and interest, you’re simply settling the total debt for a portion of what’s owed, including penalties and interest. The problem is that not everyone will qualify for an Offer in Compromise.
Short of an Offer, there’s not much that can be done to avoid paying interest that has accrued on the liability. Certainly you could amend your return in order to reduce the tax owed. Once the original tax liability is reduced, the IRS will re-compute the interest owed based on the lower liability amount. This is of little use if you are stuck paying interest on a liability that was accurately assessed. The only other way to avoid paying interest that has accrued is to wait out the IRS’s 10 year collection window. However, the IRS will attempt to collect on a debt before their collection window expires with vigor. Planning to ride out the 10-year collection window is rarely a viable option, and shouldn’t be considered without a thorough assessment of the state of your liabilities and other resolution options that may available.
Reasonable cause abatement
The IRS has a bit more leeway when it comes to the abatement of penalties than it does with interest. There are two main avenues by which you can have penalties abated. The first is for reasonable cause. The IRS’s threshold for what constitutes reasonable cause is a very high bar to clear – it would generally require hospitalization of yourself or your immediate family member or some kind of disaster situation that prevented you from being compliant in your obligations. In addition, once the circumstance that gives rise to a reasonable cause exception has subsided, the IRS expects you to immediately take action to come back into compliance. If you delay at all in filing an outstanding return or paying a balance owed, the IRS has grounds to refuse to grant a reasonable cause abatement.
A possible ray of sunshine in an IRS program? You betcha!
Qualifying for First Time Penalty Abatement
About 95% of taxpayers that are eligible for First Time Penalty Abatement do not request it, and you’d better believe that the IRS will not go out of its way to make it known that you might be eligible for First Time Abatement.
Under First Time Penalty Abatement, the IRS will abate the penalties for failure-to-file, failure-to-pay, and (in the case of businesses) failure-to-deposit penalties associated with your first year of non-compliance. Two conditions need to be met in order for a taxpayer to qualify for first time abatement:
- You were not required to file a return or has had no prior penalties for the preceding 3 years to the one in which you are requesting first time abatement, and
- You have filed, or filed a valid extension for, all currently required returns and paid, or has arranged to pay, any tax due.
How much could you potentially save?
While you used to be able to request First Time Penalty Abatement online through the IRS’s e-services website, you may now only request First Time Abatement over the phone or in writing.
Even if it has been a number of years since you have been compliant with your filing and payment obligations, First Time Abatement may still be useful in reducing the balance owed to the IRS. While you have only three years to request a refund from the IRS, First Time Penalty abatement operates as a credit to your account and is therefore not bound by IRS limitations on refunds. Even if your first year of non-compliance was 10 or more years ago and the balance associated with that year has been completely paid off, the IRS can abate the penalties associated with that tax year and credit a more recent liability.
It is impossible to know just how much you could save, but it is almost always worth the phone call to the IRS to make a request!