Can Tax Penalties Be Waived by the IRS?

The IRS imposes penalties for non-compliance (e.g., late filing, payment). Penalty abatement programs can reduce or eliminate these charges under qualifying circumstances.

Understanding Common Penalties

The IRS assesses penalties for failure to file, pay, and accuracy issues. Each is triggered by specific actions or inactions.

Failure to File Penalty

Failure to file penalties apply if a return is not submitted by its due date, including extensions. The penalty is 5% of unpaid taxes per month (capped at 25%). If over 60 days late, a minimum penalty applies: the lesser of $435 or 100% of tax due.

Failure to Pay Penalty

Failure to pay penalties apply if taxes are not paid by the due date. The penalty is 0.5% of unpaid taxes per month (capped at 25%). Filing on time reduces this penalty, even if the full amount cannot be paid.

Accuracy-Related Penalties

Accuracy-related penalties apply for understated tax liability due to negligence, disregard of rules, or substantial understatement. Negligence is not attempting to follow tax laws; disregard is ignoring them. For individuals, a substantial understatement is 10% of tax required or $5,000, whichever is greater. This penalty is 20% of underpaid tax.

Qualifying for a Waiver

Penalty waivers are available via “reasonable cause” or “First-Time Penalty Abatement” (FTA). These offer relief when circumstances beyond a taxpayer’s control prevent meeting tax obligations. The IRS evaluates requests based on eligibility criteria.

Reasonable Cause

Reasonable cause applies if a taxpayer exercised ordinary business care but could not comply due to unforeseen circumstances. Acceptable reasons include serious illness/death, natural disasters, or inability to obtain records. The IRS may also consider incorrect written advice. Ignorance of the law or lack of funds do not qualify.

First-Time Penalty Abatement (FTA)

The First-Time Penalty Abatement (FTA) program offers administrative relief. Eligibility requires a clean compliance history (no penalties in three prior tax years). All required returns must be filed, and taxes due paid or arranged for (e.g., installment agreement). FTA applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. It is a one-time program based on compliance history.

Preparing Your Waiver Request

To request a penalty waiver, taxpayers must gather specific information and documentation. This provides the IRS details for evaluation. The process involves identifying the penalty, explaining non-compliance, and providing supporting evidence.

How to Request Abatement

Penalty abatement can be requested by calling the IRS, submitting a written statement, or using Form 843, “Claim for Refund and Request for Abatement”. On Form 843, accurately fill in personal/business information, the related tax period, and the contested penalty amount.

Form 843 Details

The form requires indicating the tax/return type and the Internal Revenue Code section. Provide a detailed explanation for penalty removal, outlining non-compliance circumstances. For reasonable cause, explain how external factors prevented timely filing/payment. Attach supporting documentation (e.g., medical records, police reports, correspondence).

After Submitting Your Request

Once a penalty waiver request is prepared, submit it to the IRS. Understanding timelines and appeal options helps manage expectations and ensures resolution. The IRS has procedures for handling requests and denials.

Submission Methods

Requests can be mailed via Form 843 or written statement to the IRS service center where the original return was filed. For some penalty relief (especially First-Time Penalty Abatement), taxpayers can call the toll-free number on their IRS notice. If phone approval is not immediate, a written request is needed.

Processing Time

Processing time for penalty abatement varies. First-Time Penalty Abatement requests may receive instant decisions, processed within weeks. Written reasonable cause abatement requests take longer (two to four months for initial determination). Complex cases may take several months. While pending, continue paying outstanding tax liability to prevent additional penalties and interest.

Appeals

If the IRS denies a penalty waiver, taxpayers can appeal. Appeals are made through the IRS Independent Office of Appeals, separate from the initial assessment office. Taxpayers have 30 days from the rejection letter to file. This process allows presenting additional information or arguments to an impartial reviewer. The Internal Revenue Service (IRS) imposes penalties to encourage compliance with tax laws, but it also provides avenues for taxpayers to seek relief from these penalties. A tax penalty is a charge assessed when a taxpayer fails to meet specific tax obligations, such as filing a return on time or paying taxes due. While these penalties can add to a tax burden, the IRS offers programs and provisions that allow for the reduction or elimination of certain penalties under qualifying circumstances. This process, known as penalty abatement, is an important consideration for taxpayers who find themselves facing such charges.

Understanding Common Penalties

The IRS assesses various penalties, with some of the most frequently encountered being those for failure to file, failure to pay, and accuracy-related issues. Each type of penalty is triggered by specific actions or inactions related to tax obligations. Understanding these common penalties provides context for why abatement might be sought.

A failure to file penalty applies when a tax return is not submitted by its due date, including extensions. This penalty typically amounts to 5% of the unpaid taxes for each month or part of a month the return is late, capped at 25% of the unpaid tax. If a return is more than 60 days late, a minimum penalty may apply, which is the lesser of $435 or 100% of the tax due.

A failure to pay penalty is assessed when taxes owed are not paid by the due date. This penalty is generally 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, also capped at 25% of the unpaid tax. It is important to note that even if one cannot pay the full amount due, filing the return on time helps reduce the accumulation of this penalty.

Accuracy-related penalties are imposed when taxpayers understate their tax liability due to negligence or disregard of rules, or a substantial understatement of income tax. Negligence involves not making a reasonable attempt to follow tax laws, while disregard means carelessly, recklessly, or intentionally ignoring tax rules. For individuals, a substantial understatement occurs if the tax liability is understated by 10% of the tax required to be shown on the return or $5,000, whichever is greater. This penalty is typically 20% of the underpaid tax.

Qualifying for a Waiver

Taxpayers can qualify for a penalty waiver through several avenues, primarily “reasonable cause” or the “First-Time Penalty Abatement” (FTA) program. These provisions offer relief when circumstances beyond a taxpayer’s control prevent them from meeting their tax obligations. The IRS evaluates each request based on specific criteria to determine eligibility.

Reasonable cause applies when a taxpayer demonstrates that they exercised ordinary business care and prudence but were unable to comply with tax laws due to unforeseen circumstances. Examples of acceptable reasons include serious illness or death of the taxpayer or an immediate family member, natural disasters like fires or civil disturbances, or the inability to obtain necessary records. The IRS may also consider instances where taxpayers received incorrect written advice from the IRS and reasonably relied on it. However, factors such as ignorance of the law or lack of funds generally do not qualify as reasonable cause.

The First-Time Penalty Abatement (FTA) program offers a specific type of administrative relief for certain penalties. To be eligible for FTA, a taxpayer generally must have a clean compliance history, meaning they have not received any penalties for the three tax years prior to the year the penalty was incurred. Additionally, all required returns must have been filed, and any taxes due must have been paid or arrangements made to pay them, such as through an installment agreement. FTA typically applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. This program is a one-time consideration, and eligibility is based on compliance history rather than a detailed explanation of circumstances.

Preparing Your Waiver Request

To formally request a penalty waiver, taxpayers must gather specific information and documentation to support their claim. This preparation is crucial for a successful abatement request, as it provides the IRS with the necessary details to evaluate the case. The process involves identifying the penalty, explaining the reasons for non-compliance, and providing supporting evidence.

Taxpayers can request penalty abatement by calling the IRS, submitting a written statement, or using Form 843, “Claim for Refund and Request for Abatement”. Form 843 is commonly used for this purpose and allows taxpayers to formally state their case. When completing Form 843, it is important to accurately fill in personal or business information, the tax period to which the penalty relates, and the specific penalty amount being contested.

The form also requires indicating the type of tax or return involved and, if known, the Internal Revenue Code section applicable to the penalty. A detailed explanation of why the penalty should be removed must be provided, outlining the circumstances that led to the non-compliance. For reasonable cause requests, this explanation should clearly describe how external factors prevented timely filing or payment. Supporting documentation is essential and should be attached to the request, such as medical records, police reports for theft, or correspondence that substantiates the claims made.

After Submitting Your Request

Once a penalty waiver request has been prepared, the next step involves submitting it to the IRS and understanding the subsequent process. Proper submission methods and awareness of potential timelines and appeal options are important for managing expectations and ensuring a complete resolution. The IRS has established procedures for handling these requests and for addressing denials.

Requests can often be submitted by mailing Form 843 or a written statement to the IRS service center where the original return was filed. For some penalty relief requests, particularly for First-Time Penalty Abatement, taxpayers may be able to call the toll-free number on their IRS notice to request relief over the phone. If an immediate approval is not possible by phone, a written request will be necessary.

The time it takes for the IRS to process a penalty abatement request can vary. First-Time Penalty Abatement requests may receive an instant decision, with the penalty removal processed within a few weeks. Written requests for reasonable cause abatement typically take longer, often ranging from two to four months for an initial determination. Complex cases or those requiring additional review may take several months. While the request is pending, it is advisable to continue paying any outstanding tax liability to prevent additional penalties and interest from accruing.

If the IRS denies the penalty waiver request, taxpayers have the right to appeal the decision. An appeal can be made through the IRS Independent Office of Appeals, which operates separately from the office that initially assessed the penalty. Generally, taxpayers have 30 days from the date of the rejection letter to file an appeal. This process provides an opportunity to present additional information or arguments to an impartial reviewer.