Let me start by confirming the rumor: yes, it is true that the IRS and most State tax agencies will consider forgiving, or as it’s referred to in the tax world, “abating,” penalties if you owe past-due income tax, payroll taxes, or sales tax. However, as you should know from reading my prior blogs, I love to point out that asterisks almost always come into play when dealing with the IRS or States on past-due tax account issues. In short, there has to be a justifiable reason/excuse outside of the responsible party’s control for the IRS or state to agree that forgiving penalties is a fair decision.

Before we get into the reasons why the IRS or State tax agencies will consider removing penalties on a past-due tax debt, let’s talk about why they exist in the first place. First, remember that our tax system relies on voluntary compliance. How is it considered a “voluntary” system? Because taxpayers are counted upon to report their quarterly or annual financial activities directly and “self-report” income, sales, and payroll taxes owed. If we were not in a “voluntary” system, we would all have to meet with government agents on a monthly, quarterly, or annual basis to provide our records and have them determine how much is due in taxes.

As outlined in the IRS’ Internal Revenue Manual in §20.1.1.2, Purpose of Penalties, “Penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code.” To put it in layman’s terms, it discourages taxpayers nationwide from not meeting and upholding their tax reporting and payment obligations. Once a taxpayer realizes that if they fail to file their annual tax return on time, the IRS can leverage a failure to file penalty equal to 5% of the unpaid taxes for each month or part of a month that a tax return is late and that the penalty maxes out 25%, it can hit the wallet hard enough to discourage this behavior from being repeated.

Though there are other categories the IRS and most States will consider abating penalties for, the primary category is referred to as “reasonable cause.” The following situations typically fall into this category:

• Death, serious illness, or unavoidable absence,
• Fire, casualty, natural disaster, or other disturbance,
• Unable to obtain records,
• A mistake was made,
• Erroneous advice or reliance,
• Ignorance of the law,
• And more.

Some of these reasons are pretty easy to justify, others not so much.

Keep in mind that a request to remove penalties assessed on a tax account needs to follow a reasonable timeframe for the basis of the request. Let’s take, for example, a janitorial services business named JDM Janitorial, LLC, operating out of St. Louis, Missouri. JDM Janitorial, LLC is owned and operated by one person, a single gentleman named Jack Morgan, and he has run this business successfully for 15 years. In 2023, Jack suffered a major heart attack on March 1st and could not return to his duties until May 10th. Though JDM Janitorial, LLC distributed the net payroll to its employees under the tutelage of the office manager during Mr. Morgan’s absence, the payroll taxes were not paid. Upon his return to the office, Mr. Morgan realized the error and immediately submitted payments to the IRS and the State of Missouri for the past-due payroll taxes owed for the 1st and 2nd Quarters of 2023. In this instance, the IRS and State of Missouri would consider abating any penalties for late filing or paying because Mr. Morgan’s absence was unable to be anticipated, it was based upon a serious illness, and upon his return to the office, he immediately addressed the company’s failure to address the tax obligations as it is required to do.

Now, let’s take the same example but change the timeframe a bit. Let’s say the business first started accruing payroll tax obligation issues in January 2019 with the occasional missed payroll tax deposit. The company began a habit of accruing a tax bill, then addressing it, then accruing again. The cycle continues in this manner for several years, leading up to Mr. Morgan’s heart attack on March 1st. Upon his return to the office on May 10th, he paid what he could, but could not bring the payroll tax obligations compliant until January 30th of 2024. How would the IRS view a request for the penalties to be abated in this circumstance? Based on my 24+ years of experience, the tax account history leading up to Mr. Morgan’s heart attack would reflect poorly on any abatement request that would be submitted based solely on his medical condition. You may be able to secure understanding for a quarter or two immediately surrounding the definable event, but anything beyond would be an anomaly.

If you or your client has a tax account debt with penalties assessed that you believe should be considered for abatement, contact the Golden Lion Tax Solutions team. With over two decades of first-hand experience with this type of request, we have the knowledge and expertise to identify what could and, most importantly, should be considered for this type of relief with the IRS and State tax agencies.

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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.