Three Types of Relief From IRS Tax Penalties

Hand with tax bundle around person

You may qualify for relief from penalties if you made an effort to comply with the requirements of the law, but were unable to meet your tax obligations, due to circumstances beyond your control. Penalties eligible for penalty relief include:

  • Failing to file a tax return;
  • Failing to pay on time;
  • Failing to deposit certain taxes as required;
  • Taking improper deductions under the accuracy related penalty.

Three Types of Penalty Relief

1. Penalty Relief Due to Reasonable Cause

First, check to see if the information in your notice is correct. If you can resolve an issue in your notice, there may be no penalty.

You can get penalty relief based on Reasonable Cause. Reasonable cause is based on all the facts and circumstances in your situation. We will consider any reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.

The IRS will consider any sound reason for failing to file a tax return, make a deposit, or pay tax when due. Sound reasons, if established, include:

  • Fire, casualty, natural disaster or other disturbances;
  • Inability to obtain records;
  • Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family;
  • Other reasons which establish that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.

Note: A lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time. However, the reasons for the lack of funds may meet reasonable cause criteria for the failure-to-pay penalty.

Facts we need in order to establish Reasonable Cause:

  • What happened and when did it happen?
  • What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file and/or pay your taxes timely?
  • How did the facts and circumstances affect your ability to file or pay your taxes or perform your other day-to-day responsibilities?
  • Once the facts and circumstances changed, what actions did you take to file or pay your taxes?

Most reasonable cause explanations require that you provide documentation to support your claim, such as:

  • Hospital or court records or a letter from a physician to establish illness or incapacitation, with specific start and end dates
  • Documentation of natural disasters or other events that prevented compliance

2. Penalty Relief Due to First Time Penalty Abatement Policy

The IRS may provide administrative relief from a penalty that would otherwise be applicable under its First Time Penalty Abatement (FTA) policy. However FTA relief only applies to a single tax period. For example, if a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods. In addition to qualify for the FTA policy, you must have filed all required tax returns and paid, or arranged to pay, all tax currently due.

Note: the failure-to-pay penalty will continue to accrue, until the tax is paid in full.

3. Penalty Relief Due to IRS Administrative Waiver or Other Statutory Exception

You may qualify for administrative relief if you received incorrect oral advice from the IRS. If you received incorrect written advice from the IRS, you may qualify for this statutory exception under Internal Revenue Code Section 6404(f). If you feel you were assessed a penalty as the result of erroneous written advice you received from IRS, the following items may be needed when requesting penalty relief:

  • Your written request for advice.
  • The erroneous written advice you relied on that was furnished to you by the IRS.
  • The report, if any, of tax adjustments identifying the penalty or addition to tax, and the items relating to the erroneous advice.

Generally, Form 843, Claim for Refund and Request for Abatement should be filed to request penalty relief based on incorrect written advice from IRS.

Tax legislation may provide a specific exception to a penalty. An example would be under Internal Revenue Code Section 7508 time for performing certain acts postponed by reason of government service in presidential declared combat zone.

If you have any questions about IRS penalties please call Gregory J. Spadea at the Law Offices of Spadea & Associates, LLC at 610-521-0604.

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