If a penalty was incorrectly levied (e.g., an incorrect determination of liability or a failure to credit a payment), then it is necessary to challenge the penalty by formally contesting the penalty. This can be done by calling the number on your notice, or by submitting IRS Form 843 to ask for the penalties be abated or already paid to be refunded.
Disputing an incorrect IRS penalty requires clear communication and specific documentation. Depending on your situation and how far along the assessment process is, follow these steps to request relief:
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- Check the appropriate boxes
- Provide an explanation
- Deadlines
IRS Penalty Relief If the Penalty Is Incorrect: How to Fix a Wrong IRS Penalty Notice
If you have gotten an IRS notice and you think this is an incorrect IRS penalty, don’t ignore it. A failure to get IRS penalties right can sometimes be corrected, but there are a couple of IRS processes to use, and proof to provide. You can in many instances ask the IRS to remove, reduce, abate or refund the penalty if there was an incorrect application, an error by the IRS, posting the payment to the wrong tax period or qualify for penalty relief.
The shortest way will be found on facts. You may be able to address some of the issues by calling the IRS notice. Others need to submit a written request for penalty relief (Form 843), a reasonable cause explanation, an IRS penalty appeal or First Time Abate. Taxpayers can seek administrative relief through phone or in writing and, if they cannot get the relief they want over the phone, they can request it in writing using Form 843 for IRS. (irs.gov)
What to Do If the IRS Penalty Is Wrong
Keep in mind the notice. Find the notice number, type of penalty, tax period, amount of the penalty, interest amount, notice date and response deadline. Compare it with the IRS notice, and then compare it with the IRS record on your own.
The practical answer would be this if IRS was responsible for issuing the penalty in error, and it was the taxpayer’s search term. This can be the payment confirmation, the proof of electronic filing or certified mail receipt, the extension confirmation, the tax return transcript or the IRS account transcript. The IRS provides individuals access to tax records and tax transcripts online and/or via mail, such as tax return and account transcripts. (irs.gov)
A failure to pay penalty could be issued to a taxpayer who pays electronically prior to filing date if the payment is late, is not for the current year or is on an incorrect account. This shouldn’t be a request for forgiveness from that tax-payer. The more robust request provides the reasoning for the penalty not to have been imposed and includes a letter of confirmation of the payment, bank record, IRS account transcript and a copy of the notice.
In general, it’s called the IRS Penalty Relief Program, but the IRS has several different ways to provide relief, such as correction of IRS error, reasonable cause, First Time Abate, administrative waiver and appeals.
What Is an Incorrect IRS Penalty?
An incorrect IRS penalty is a penalty that is factually, legally and/or procedurally incorrect. It can be found on an IRS penalty notice letter even if the taxpayer timely filed for and was given an extension for filing the tax return, paid the tax timely, or had already settled the tax completely.
When a Penalty Should Not Have Been Charged
A penalty may be incorrect when:
- The return was filed on time.
- The tax was paid on time.
- The IRS posted a payment to the wrong tax year.
- The IRS processed the return late.
- The IRS assessed the same penalty twice.
- The notice lists the wrong tax period.
- The penalty relates to a return already filed.
- The IRS made a clerical or account adjustment error.
- The notice uses an incorrect taxpayer identification number.
This is where IRS penalty relief in the event that you filed on time is crucial. If you filed your returns on time, then you should make the request to correct the account, not to plead for relief, and provide proof of timely filing (e-file acceptance record, certified mail receipt).
Incorrect Penalty vs. Penalty Relief
If the penalty was applied incorrectly, then there is no need for the IRS penalty to apply. Penalty relief essentially allows the penalty to be applied but the penalty can be abated due to a qualifying relief standard, such as reasonable cause, First Time Abate, or an administrative waiver.
A strong penalty abatement request is not just one that is pointing out that the penalty is unfair. It outlines the facts and circumstances, pinpoints the error in the penalty assessment and offers documentation to justify the IRS to lift or adjust the penalty.
Common Reasons the IRS Charges a Penalty by Mistake
IRS Says You Filed Late, But You Filed on Time
One of the most frequently made IRS late filing penalty mistake situations is when it comes to filing extensions. The IRS notice may indicate that a taxpayer has proof of electronic filing, an accepted extension and/or a certified mail receipt, but IRS does not show a failure to file penalty.
This may occur due to a delay in IRS processing, due to rejected e-file (corrected later), IRS transcript mismatch or due to a lack of a record of the return filed. If filing is confirmed by IRS, an extension is accepted, and IRS transcript is used to establish the filing timeline, include Certified Mail Records, IRS transcript and filing confirmation with extension.
IRS Says You Paid Late, But You Paid on Time
An IRS late payment penalty error is another common error. You paid late, but there is a record from your bank account, record on EFTPS, Direct Pay confirmation or record from your card processor that you paid earlier.
The tax penalty relief from IRS if you paid on time should be included in this, with precise dates. Attach the payment number confirmation, payment posting date, bank withdrawal record, tax year and payment type. Request an IRS account adjustment and penalty removal if the payment to the IRS was made wrong.
IRS Applied Your Payment to the Wrong Tax Period
Sometimes the estimated tax payments, amended return payments, installment agreement payments and payroll tax deposits are made to the wrong year/accounts. This could lead to an unbalanced due balance and result in failing to pay penalty.
When there is an IRS account transcript penalty error, and the payment listed is for the wrong tax year, you should request correction of account error, penalty abatement and interest adjustment, if applicable.
Duplicate Penalty Assessment
Occasionally, the IRS imposes a penalty twice, particularly in cases where an amended return, later processing of a return or an account adjustment is completed. If a duplicate penalty assessment is issued, a penalty assessment review, transcript entries and copies of the previous IRS letters should be filed to challenge the duplicate penalty assessment.
IRS Notice Shows the Wrong Taxpayer or Tax ID
There is a possibility for notices to be sent to businesses and individuals with an incorrect taxpayer ID, incorrect tax period or wrong entity account. If so, the answer should precisely specify the mismatch and provide evidence of the accurate SSN, EIN, tax year or filing entity.
IRS Penalty Relief Options If the Penalty Is Incorrect
Correction of IRS Error
A reasonable cause request may not be the best option if the IRS has made a mistake; it might be best to try a IRS penalty correction process. This could be due to such reasons as IRS clerical error, misapplying the payments, duplicate assessment, or tax period.
If the penalty is being requested it should state that the penalty has been incorrectly assessed and should be withdrawn as the account record is incorrect.
Reasonable Cause Penalty Relief
The reasonable cause penalty relief is available if the taxpayer provides proof of a good business reason why he failed to comply and there is proof that he acted in a reasonable way and with ordinary business care and prudence. IRS considers reasonable cause in each case according to the facts and circumstances.
Some examples include serious illness, family death, natural disaster, inability to get the necessary records, etc. out of the taxpayer’s control. A reasoned explanation should be clear, factual and clearly related to the penalty.
First Time Abate Penalty Relief
First Time Abate is a relief from administrative penalties due to good tax compliance history. The IRS says that if a taxpayer seeks reasonable cause relief and yet is eligible for First Time Abate, it can apply First Time Abate based on taxpayer’s good compliance history.
This can be helpful if you are trying to deal with some of the failure-to-file, failure-to-pay or failure-to-deposit penalties, but it is not the same as establishing that the IRS penalty is incorrect.
Form 843 Penalty Abatement or Refund Request
If you want to claim a refund or request abatement of any of these taxes, interest, penalties, fees or additions to tax, you should use Form 843. Use it if the IRS process or IRS notice requires a formal written request – particularly if the IRS penalty is a result of having paid it and you want an IRS penalty refund.
This could also apply to any IRS tax penalty relief that is requested for tax penalties and interest where the tax penalties are incorrect, and related interest should be adjusted.
IRS Penalty Appeal
If you request IRS penalty relief and the IRS denies your request, you have options for requesting an IRS Independent Office of Appeals conference or hearing. The IRS recommends that the deadline for appealing a rejection is usually 30 days after the date the IRS sends the rejection letter; however, this date is determined by the specific rejection letter.
A written protest must be sent to the IRS (not Appeals) as stated in the letter that explains the appeal rights. (irs.gov)
How to Dispute an Incorrect IRS Penalty (Step-by-Step Guide)
1: Read the IRS Notice Carefully
Notice number, year, type of penalty, amount of penalty, amount of interest, due date and IRS phone number. The notice will usually give you clear instructions as to what to do.
2: Confirm Whether the Penalty Is Actually Wrong
Check the notice against your return and extension, confirmation of extension, payment record, bank statement, IRS account transcript and previous correspondence. Don’t take that information as the sole evidence that the tax software was a failure. In order to qualify for IRS penalty relief in case of tax software failure, you will be required to show what occurred, when you found it, as well as the speed at which you resolved the problem.
3: Identify the Penalty Type
Failure-to-file, failure-to-pay, accuracy-related penalty, estimated tax penalty, information return penalty and other civil tax penalties are common penalties. The failure to file and failure to pay penalties are addressed by IRC § 6651, and there are reasonable cause concepts that are included within the failure to pay.
4: Decide Whether to Call, Write, File Form 843, or Appeal
If the correction is easy and you have evidence to present to the IRS, call the IRS. If there are facts that need to be explained, write a Penalty Relief letter. Fill out Form 843 for requests to abate or get credits for some penalties and interest. If you don’t receive penalty relief, and your letter provides appeal rights, then appeal.
5: Prepare a Clear Penalty Relief Letter
Your IRS penalty relief letter must contain your name, address, notice number, tax period, type of penalty, the amount of the penalty, facts timeline, reason for the erroneous penalty and an explicit request for the removal, abatement, adjustment, or refund of the penalty. Glue all of the evidence of penalty relief.
6: Send the Request to the Correct IRS Address
Do not use the address found on the IRS notice unless instructed to do so on the instructions of the form. The IRS “Where to File” rules for Form 843 vary based on the tax and filing the document for. (irs.gov)
7: Track the IRS Response
Make copies of all. Save proof of mailing, fax confirmation, call notes, IRS rep information and calendar reminders. When a penalty adjustment letter is sent to you from the IRS, check your account transcript to make sure that you were actually removed from the penalty.
Documents Needed for IRS Penalty Relief
Core documents may include:
- IRS penalty notice
- Tax return copy
- Extension confirmation
- Proof of electronic filing
- Certified mail receipt
- Payment confirmation
- Bank statement showing payment
- IRS account transcript
- Tax return transcript
- Prior IRS letters
- Amended return records
- Payroll deposit confirmations, if business-related
Include medical records, death certificates, disaster records, insurance documents, business interruption records or a written history or timeline of events, if there is reasonable cause.
Fees, Penalties, Interest, and Expected Costs
In most cases, filing a simple penalty abatement request will not involve a complicated filing package; however, it may result in fees if you hire a CPA, enrolled agent or tax attorney. The cost of professional fees will vary with the amount of the penalty, the number of tax years involved, the requirement to file Form 843 and the disposition of the case to appeal.
IRS transcripts can be accessed for free and various types of transcript can be accessed and downloaded via an Individual Online Account.
Interest does not reflect any penalties. Where a penalty is removed, interest can be reduced for the same amount of tax, but there is less latitude in removing interest on unpaid tax. If you’re seeking IRS relief in regards to tax debt, make sure to first determine if the tax liability is accurate before working on the penalties and interest.
Legal References and Practical Cautions
It’s important to taxpayers to know that not all excuses will be accepted as reasons for relief. The Supreme Court, in United States v. Boyle, ruled that it was not presumed to be reasonable cause for late filing when relying upon an agent to file a return.
In determining that reasonable cause and good faith exist, the reasonability and good faith of the taxpayer are determined by all the facts and circumstances for penalties for accuracy. Taxpayers have rights, too (irs.gov). The Taxpayer Bill of Rights (IRS) guarantees taxpayers a fair and equitable administrative appeals process for many IRS actions, such as a majority of penalties.
Common Mistakes to Avoid
- Ignoring the IRS notice deadline
- Sending a generic “please forgive my penalty” letter
- Requesting reasonable cause without evidence
- Assuming an extension gives more time to pay
- Using Form 843 for every issue without reading the notice
- Failing to check the IRS account transcript
- Not keeping copies of the penalty abatement request
- Waiting too long after penalty relief denied
A player’s action on the ball after penalty relief is denied is considered to be a violation of penalty relief and is not allowed.
When to Contact a Tax Lawyer or Tax Professional
Tax Lawyers and Tax Professionals can be contacted once a specific period.
If the penalty is substantial, IRS has refused to grant relief, the payroll taxes are at fault, multiple tax years are open and/or a written IRS penalty response is required, it may be wise to hire an IRS penalty relief attorney, IRS penalty relief lawyer, CPA or enrolled agent to handle IRS penalty issues on your behalf.
Prior to replying to the notice, the tax attorney for IRS penalties can examine the notice, transcript, penalty code, payment history and appeal rights. This is particularly beneficial in the event the IRS notice lists the wrong balance, the penalty is based on accuracy, or in the event that you require tax resolution penalty help.
Official IRS Portal and Contact Guidance
Use the phone number and address from the IRS notice that is provided. Please bring the notice, tax return, payment records, transcript and documents supporting the return with you when you call. Use IRS Individual Online Account or the IRS Get Transcript to review your transcript. Taxpayer Advocate Service may be a good option if hardship is not resolved, IRS delays have occurred more than once, or there are significant issues with the taxpayer’s account.
FAQs About IRS Penalty Relief If the Penalty Is Incorrect
Can I get IRS penalty relief if the penalty is incorrect?
Yes. You can petition the IRS to correct, abate, remove or refund a penalty if it is factually or legally incorrect.
What should I do first if the IRS penalty is wrong?
Read the notice, determine the penalty and tax period, view IRS account transcript and collect evidence.
Can I call the IRS to remove an incorrect penalty?
Yes, by phone you can deal with some of the simple correction problems. If there are more detailed issues, then a written request is required.
Do I need Form 843 for IRS penalty relief?
Sometimes. Some requests for refund or abatement of penalties, interest, fees, taxes and additions to tax are made on Form 843.
What documents help prove an IRS penalty is incorrect?
Confirmation, payment confirmation, certified mail receipt, IRS account transcript, tax return transcript and previous correspondence from the IRS are some of the documents that may be useful.
What is reasonable cause for IRS penalty relief?
When a taxpayer is required to provide reasonable cause, it’s generally a valid and documented reason and the taxpayer acted in an ordinary business manner and with prudence.
Can I appeal if the IRS denies penalty relief?
Absolutely, there are many instances in which a penalty denial decision can be appealed, typically in accordance with the appeals period set forth in the IRS’s denial letter.
Should I hire a tax lawyer for an incorrect IRS penalty notice?
If the penalty is significant, the IRS declined to provide relief, it’s a business tax issue or an appeal is needed, consider professional assistance.
Conclusion
Proof is the beginning of IRS penalty relief when the IRS issues an incorrect penalty. Read the notice, check the tax period and the type of penalty, gather documents and be sure to submit the information to the IRS in the right way. Regardless of whether you’re doing an IRS penalty appeal, a Form 843, First Time Abate, or correction of your accounts, a clear and well documented response will best help you get a wrong IRS penalty removed.