If you are not an Offer in Compromise candidate, there are still ways to request a reduction in your tax debt. These requests are called Penalty Abatements with the IRS and Penalty Abatements or Waivers with the States. The purpose of these requests is to remove or reduce the penalties assessed to a tax debt. But how do you submit these requests, and how do you qualify?

Before we get into the process of submitting the request, it’s best to review how to qualify for a Penalty Abatement or Waiver. Because the IRS and States are tasked with collecting a tax debt and all penalties, interest, fees, and fines assessed on the debt, a taxpayer must display reasonable cause when asking for the forgiveness of the penalties charged. The barometer usually used is referred to as “reasonable cause.”

What is reasonable cause?

Reasonable cause is essentially anything outside the taxpayer’s control that directly contributed to the tax debt having been accrued. While the specifics of what is classified as “reasonable cause” is considered on a case-by-case basis, the IRS and States have some general guidelines of what falls into this category:

• Death or serious illness,
• Unavoidable absence of the taxpayer,
• Destruction of records due to fire, natural cause, or other qualifying casualties,
• Erroneous error or advice by a CPA, Bookkeeper, or Tax Return Preparer,
• Error on the IRS or State’s part, and more.

Though these are the primary and most common reasons the IRS or State will consider a Penalty Abatement or Waiver, other explanations and circumstances can be considered.

How do I apply for a Penalty Abatement/Waiver?

The strongest Penalty Abatement/Waiver requests will always tie the tax debt accrued directly to the events that caused it. If the Penalty Abatement/Waiver is for an Individual’s tax account, it’s a straightforward request; conversely, if the request is being submitted on behalf of a business that accrued a tax debt, ordinary business care and prudence will need to be proven in conjunction with the request. The request will outline in detail the timeline of events, any tax laws or rule that apply to the specific situation, and related cases or examples previously approved by the IRS or State to support the request’s approval.

The IRS and State will review the request in its entirety to issue a first-level determination of approval, partial approval, or denial. If the IRS or State approves or partially approves the request, a notice will be issued, and the account will be adjusted accordingly. In addition to penalties being reduced or removed after approval or partial approval, any interest associated with the penalty amount originally assessed will also be reduced.

What happens if the IRS or State denies a request for Penalty Abatement or Waiver of penalties?

The IRS and most States do allow an appeal of the denial of an abatement or waiver request. The IRS generally allows 30 days from the date of the denial letter to file an appeal. Each State that allows consideration of Penalty Abatement/Waiver requests will have varying deadlines for filing an appeal, though most will allow 30 days to challenge the rejection.

When filing the appeal, it is crucial to review the rationale of the denial and determine if an appeal will be worth the continued time and effort required to challenge the rejection. If you decide that appealing the rejection is appropriate, you must thoroughly address the rejection points and provide additional information and documentation to support the appeal to ensure a more successful outcome. If the counterargument is not a strong one, the appeal may not be a success.

What are the different types of penalties that can be abated?

The IRS and States have several different types of penalties associated with tax debts, and not all of them qualify for an abatement or waiver request. The types of penalties a taxpayer can request an abatement on generally are failure to file, failure to pay, and accuracy-related.

• Failure to File – Refers to the timely filing of a tax return(s) either by an individual or business.
• Failure to Pay – Refers to the tax payments reported on a tax return that must be paid to the taxing authority that either was not fully submitted, partially submitted, or not paid at all.
• Accuracy-Related – Refers to the underpayment of tax; this usually is caused by the failure of the taxpayer to accurately report the tax due on the return either through income not included or a claim of more deductions/expenses than the taxpayer was allowed to claim.

First-Time Abatement Request

Only the IRS has an option for a First Time Abatement penalty relief. This request is a relatively straightforward request to submit if the taxpayer qualifies. The qualifications include being compliant with all tax return and deposit requirements and having not received the same penalty within the preceding three tax years.

In Summary

Penalty Abatements and Waivers are not handed out like candy by the IRS and States… it has to be for a sound and justifiable reason. Over the last two decades, the Golden Lion Tax Solutions team has compiled, submitted, and negotiated thousands of successful Penalty Abatement and Waiver requests with the IRS and States. We pride ourselves on being ethical and honest with each client’s likelihood of success with a Penalty Abatement/Waiver. If we believe our client deserves a Penalty Abatement or Waiver based on their unique situation, we will fight through as many levels of the IRS or State as possible to secure approval. However, if we do not have a sound reason to believe a client’s situation will allow for the IRS or State to seriously consider abating or waiving the penalties, we will not encourage our client to spend their time and money in this direction. The Golden Lion Tax Solutions team truly believes that each client deserves honesty from their trusted tax representative, which sets us apart from the others in our industry.

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For help with your tax debts, email contactus@goldenliontaxsolutions.com or call 833-LION-TAX (833-546-6829)

Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.