You may be able to reduce or eliminate IRS penalties after receiving a notice by either claiming a First-Time Abatement (one time administrative waiver) or Reasonable Cause (ordinary business care was exercised but not able to meet the requirements).
Requests for Penalty Relief will Come from
1. First-Time Penalty Abatement
As pointed out by Advocate Shahid (Tax Analysis and Advisory Specialist). This is the simplest and most popular course if the compliance record is good. Qualifications: you must be:
No penalties for the same type of tax for the previous three tax years.
Completed all the returns that are in the current state of obligation.
Paid (or arranged to pay) any tax that is due at this time.
2. Reasonable Cause Relief
If you are not eligible for First-Time Abatement, then you may argue reasonable cause. If you have good, documented reason for not paying you can waive penalties with the IRS, including:
- An injury, serious illness or incapacitation of an immediate family member or yourself.
- In unavoidable absence, a student is not able to attend school due to factors that cannot be changed (for example, absence because student is away from school or in prison).
- Natural disasters, fire, casualty or other extreme events.
- Failure to keep records to file.
Can IRS Penalties Be Reduced After a Notice?
Yes, there can be some IRS penalties that will be lowered or eliminated after the IRS notifies you. Depending on the type of the penalty and your tax situation, the IRS might be able to provide you with penalty relief by means of First Time Abate, reasonable cause relief, or a statutory exception.
Quick Answer
If you receive a notice from the IRS, you can potentially minimize IRS penalties by paying close attention to the notice, knowing what type of penalty you’re receiving, analyzing your tax compliance record, requesting First Time Abate, establishing reasonable cause, submitting Form 843 (if required) and appealing if an IRS denial letter is issued.
What an IRS Penalty Notice Means
The IRS notifies you of tax account issues with an official letter from the Internal Revenue Service that is known as a notice or letter. It could be for a tax debt, an IRS balance due notice, missing tax return, change in tax liability or a penalty amount associated with a tax year.
Some IRS notices, such as IRS notice CP14, IRS notice CP501, IRS notice CP503, and IRS notice CP504 will display an amount due, unpaid taxes, penalties, and interest. The first step is to read the notice carefully and compare it with the notice you’ve filed, IRS account transcript, payment history, and IRS online account for any taxpayer.
Real-Life Example
A CP14 notice is sent to a taxpayer indicating unpaid taxes, late payment penalty and interest. They review their IRS online account, verify the tax year, check payment history and determine if it is a failure to pay, failure to file or estimated tax under-payment penalty before calling the IRS.
Common Reasons the IRS Charges Penalties
The IRS can impose penalties if the taxpayer files his or her tax return late, pays the tax late, reports inaccurate information, or under-pays the tax for the year. The type of penalty is important since there may be various options for alleviation.
Failure to File Penalty
Failure to file penalty (also called late filing penalty) is imposed on failure to file the tax returns on time. The IRS will usually charge this penalty at a rate of 5% of the taxes owed per month or partial month that the return is late, to a maximum of 25%.
This can cost the taxpayer a great deal of money if he or she has unpaid taxes, as well. If you’ve been charged with this misdemeanor charge, you might want to check out if you are eligible for IRS penalty relief, like First Time Abate or reasonable cause relief.
Failure to Pay Penalty
Failure to pay penalty (late payment penalty) occurs when taxes are not paid on time. This penalty is normally 0.5% per month or part of a month that tax is unpaid and will continue until the tax is paid, up to the total amount of unpaid taxes being paid, according to the Internal Revenue Service (IRS).
Those who want IRS penalty relief because they have not paid their taxes on time should consider the reasons the taxes were not timely paid. Sometimes the reasonable cause exception will apply. Otherwise, an IRS payment plan may be a good way to pay back the debt and ease the pressure of the collection process.
Accuracy-Related Penalty
An understatement of income or an overstatement of deductions, a failure to claim a tax credit that isn’t supported by the taxpayer’s records, or a failure to disclose all income a taxpayer receives due to negligence on a tax return could result in a penalty for accuracy. Typically, the IRS determines this penalty at 20% of the amount of underpayment that’s associated with negligent, ignoring of rules, or a significant understatement of tax.
But relief would be considered for the taxpayer if he or she could prove that he or she exercised reasonable cause and good faith in reporting the proper tax. The IRS may take into account the complexity of the issue, taxpayer’s knowledge, efforts at compliance, as well as the need to use a qualified tax professional.
Estimated Tax Penalty
Typically the estimated tax penalty is imposed when individuals underestimate their tax liability for the year and don’t pay enough taxes in advance through withholding or estimated payments. This frequently can impact freelancers, business owners, investors, gig workers and others whose income isn’t completely from withholding by their employers.
As outlined by the IRS, the U.S. tax system is “pay-as-you-go” as most of the tax liability is paid as the income is earned. If the taxpayer paid too little or too late, it may result in an under payment penalty (estimated tax penalty).
How to Reduce IRS Penalties After Notice: Step-by-Step Solution
1: Read the IRS notice
Go back to the IRS notice to read the information.
Review the notice number, tax year, the type of the penalty, the amount of the penalty, the due date, the time period for appealing, IRS contact information, and the instructions for payment.
2: Find the penalty type
Determine if it’s a failure to file, failure to pay, accuracy-related or estimated tax penalty. There are different rules for the relief of each penalty.
3: Check First Time Abate
You might qualify if you didn’t have penalties for the last three tax years, submitted all the required tax returns and paid or arranged to pay the tax.
4: Try reasonable cause relief
If you have a serious reason like illness, death in the family, natural disaster, fire, flood, loss of records or involuntary business issues, then use this option.
5: Collect proof
Obtain records from hospital, death, bank statements, payment records, tax returns, IRS account statements or CPA letters.
6: Call the IRS
Please inquire about the possibility of approval by telephone for the provision of penalty relief.
7: File Form 843 if needed
If you need to submit a written request for a change, you should use IRS Form 843.
8: Set up a payment plan
Old penalties cannot be eliminated with an IRS payment plan but a plan can prevent penalties from escalating.
9: Appeal if denied
If the IRS denies, read the denial letter and appeal to the IRS before the appeal’s deadline.
IRS Penalty Relief Options Explained
Option 1: First Time Penalty Abatement
This is ideal for those taxpayers who have good records. The question “Does the IRS forgive first-time errors?” is answered with a “sometimes” answer. If you’re eligible, it may be easiest to go with First Time Penalty Abatement, particularly if you’ve filed the necessary returns and paid or set up to pay your taxes.
Option 2: Reasonable Cause Penalty Abatement
This is best if it has been caused by something that you have no control over. You might be able to get IRS penalties waived if you pay late, but it’s generally not just because you’re unable to pay. Facts, dates, effort and evidence that you attempted to comply with should be displayed.
Option 3: Statutory Exception
Where the law provides relief there is a statutory exception. This can be any written advice that is incorrectly provided by the IRS or any other legal exception.
Option 4: Penalty Appeal
If the IRS refuses to grant relief, but you have good evidence, you may be able to appeal the decision. Carefully read their denial letter and take action before the appeal deadline.
Option 5: Tax Professional Help
It is wise to consult with a CPA, EA, tax attorney, or a IRS tax resolution services provider if the facts are complicated, the IRS has already rejected relief or if the penalty is significant.
Support by a professional may come in handy when dealing with IRS penalty abatement assistance, IRS penalty relief services, IRS penalty notice assistance, IRS penalty reduction help, IRS penalty help from a tax professional, locating IRS notice tax help near me, hiring an IRS penalty relief attorney, or IRS penalty help – negotiating properly.
Real Case Laws to Include
United States v. Boyle: Do Not Blame Only the Accountant
The Supreme Court in United States v. Boyle concluded that the mere submission of a return by an agent on time was an insufficient excuse for failing to file a return on time to avoid the late filing penalty. The takeaway is that it is still the taxpayer’s obligation to file on time.
Use in “Mistakes to Avoid”:
Avoid a statement such as “My accountant forgot” when it comes to filing your taxes with the IRS. This explanation might not be sufficient. A more compelling penalty relief case will have facts, dates, documents and evidence that you exercised ordinary care and prudence.
Neonatology Associates, P.A. v. Commissioner: When Professional Reliance May Help
Neonatology Associates, P.A. v. Commissioner is helpful to understanding the concept of professional reliance. Penalties for inaccuracies are often discussed, and it is shown that relying on a professional may be helpful only when the professional is qualified, taxpayer provides complete and accurate information, and taxpayer takes action in good faith.
In this section under “When Professional Reliance May Help” you will write:
The professional advice can assist reasonable cause, but must be reasonable reliance, not blind trust.
Higbee v. Commissioner: Evidence Matters
In Higbee, the court explained that when the IRS has carried its burden for a penalty, the taxpayer has the burden of providing evidence that the penalty is incorrect and/or that a defense such as reasonable cause exists.
To use: On the “Documents That Support Your Penalty Relief Request” page:
It’s not enough simply to have a good story. The tax filer will need to provide documentation from the IRS or proof of payment, medical records, disaster records or professional correspondence to back up their request.
Case Study Section: How IRS Penalty Relief Works in Real Life
Case Study 1: First-Time Taxpayer With a CP14 Notice
The IRS issues a CP14 indicating unpaid tax, late payment penalty and interest to a taxpayer. The balance due notice initially appears to be a stressful situation, but the taxpayer goes over the notice with care and verifies the tax year, amount of the penalty and how it will be paid.
They call the IRS and ask for First time Abate because they have a clean tax compliance record, filed all of the tax paperwork and made an installment agreement with the IRS to pay the rest of the taxes. Once the account is reviewed the IRS will lift the penalty. However, there might still be a right to interest because generally interest does not cease until the entire tax balance is paid.
Case Study 2: Small Business Owner With Missing Records
After a small business owner’s tax records were destroyed in a flood, he/she receives a notice from the IRS. They aren’t just requesting forgiveness, they create a strong reasonable cause request.
They gather the insurance report, bank statements, e-mails sent to their CPA, and a timeline of them exercising ordinary care and prudence. Business owner gives explanation of records not being available due to the flood, although he/she did make an effort to get to the bank. They submit reasonable cause letter and ask for the IRS to abate the penalties with supporting documentation.
Case Study 3: Taxpayer Denied Relief
Taxpayer asks IRS to waive penalties, which IRS denies, since there’s no proof in the IRS letter. Taxpayer then appeals the penalty.
They add documents, etc., and make clear dates and events, and demonstrate corrective actions that they took. This case is a reminder of the importance of showing evidence when requesting the IRS to lessen or eliminate penalties.
What I’ve Seen When Taxpayers Respond the Right Way
The most important thing to realize about the IRS penalty situation is that the taxpayer’s sense of embarrassment and upset are the least important. The difference is whether they give a response based on facts, dates, documents and the appropriate relief request.
No IRS notice should be ignored, no matter how much you don’t agree with the amount on the balance or the penalty itself. Be sure not to wait too long, or you might end up with a higher interest rate, increased collection pressure, or you could miss the deadline for the appeal. It’s best to read the notice, determine what the penalty is, verify the tax year, and check your tax return and payment history against the IRS information.
Taxpayers should also steer clear of sending only explanations that are emotional. The word stress, forgot and accountant error alone are not enough. The stronger the request, the more strongly it links the following: the penalty, the reason, the timeline, and the proof.
For instance, if someone requests reasonable cause relief, they should provide information about what occurred, when, how it impacted their ability to file/pay, what measures they took, and which documents are in support of the relief. This will clarify, seem more professional and be easier for the IRS to read the penalty relief request.
Mistakes to Avoid After Receiving an IRS Penalty Notice
It can be just as significant not to make the wrong move as it is to seek penalty relief. Here are a few tax filing errors that taxpayers should avoid:
- Not paying the notice and waiting for the IRS to cease and desist.
- Immediately paying the full penalty without seeking relief due to e.g. First Time Abate or reasonable cause.
- Asking for penalty forgiveness when showing no proof, paperwork and/or time line.
- Failure to appeal the deadline IRS states in their letter.
- If you set up a payment plan, then the penalties will be waived automatically. A payment plan will help to work out the balance, but will not necessarily remove old penalties.
- The “my accountant forgot” syndrome with less than strong evidence. Filing on time remains taxpayer’s responsibility, courts have said.
- Not checking the IRS account transcript prior to answering. IRS transcripts can provide information regarding your tax history, account information and payment history.
- Failure to properly submit Form 843. According to the IRS, when a taxpayer receives a notice that asks him or her to file Form 843, the tax authority recommends that the taxpayer contact them via the address provided in the notice.
- Lacking supporting documents, dates, records, and facts, conveying one’s concepts and ideas emotionally.
- Until CP504 notice or collection action – stage. CP504 is a Notice of Intent to Levy and a final reminder before potentially taking any action to levy, according to the IRS.
FAQs About IRS Penalty Relief
1. Can IRS penalties be reduced after a notice?
Yes. There are ways to mitigate or eliminate some IRS penalties, depending on the type of penalty and taxpayer circumstances: First Time Abate, Reasonable Cause, Statutory Exception, and Appeal. It could be a relief for those who were trying to comply but unable to do so due to circumstances beyond their control, according to the IRS.
2. How do I ask the IRS to remove penalties?
Use the number listed on your notice if you call the IRS, or write a letter to them. If the relief by phone is denied, the IRS may ask for a Form 843 or a letter of explanation.
3. What is reasonable cause for IRS penalty relief?
Reasonable cause is when the taxpayer exercised ordinary care and prudence and failed to file, pay or comply due to attending to factors outside his or her control.
4. Who qualifies for First Time Abate?
In order to be a qualified taxpayer, they must have been free from penalties in the previous 3 years, have filed the required returns and have paid or arranged to pay the tax due.
5. Can I get IRS penalties waived if I paid late?
Possibly. Late payment penalties will be subject to relief if they are in compliance with First Time Abate requirements or can be shown to be for reasonable cause.
6. Can IRS interest be removed too?
Typically, it’s more difficult to get rid of interest. Interest on unpaid tax will also be adjusted if the IRS removes a penalty; however, penalty interest will not stop when the tax is paid.
7. How long does IRS penalty abatement take?
This relies on the way the request is made being through the telephone, in writing or appeal. Written requests will typically be received in a longer length of time than phone requests.
8. Can I appeal if the IRS denies penalty relief?
Yes. If the IRS refuses, you can request a review of the decision by the IRS Independent Office of Appeals, which typically will be within one year of the date of the IRS rejection letter.