The vast majority of penalties meted out by the IRS go unabated. Why? Most likely because people don’t know to ask for penalty relief – or they don’t think it’s worth the time or effort. Here’s why it is worth looking into.
Not filing and not paying are the most common penalties
With nearly 150 penalties in the Internal Revenue Code, you may be surprised that only a few common penalties make up 74% of all penalties issued. The most common penalties are:
- Failure to pay penalty – 56% of all penalties, imposed if you don’t pay taxes on time
- Failure to file penalty – 14% of all penalties, imposed if you don’t file a return on time
- Failure to deposit penalty – 4% of all penalties, imposed if a business doesn’t pay employment taxes on time, or pays them incorrectly
A common nuisance penalty is the late-filing penalty for partnerships and S corporations. The estimated tax penalty is often disputed by taxpayers via providing an exception when filing the tax return.
Reasons the IRS will remove penalties
You can request penalty abatement for the most common penalties using four reasons:
1. Statutory exception: proving a specific authoritative exclusion to the penalty
Statutory exceptions are uncommon and are easily explained to the IRS, mostly at tax filing. Examples include disaster relief or combat zone relief.
2. IRS error: documenting that the error was the result of reliance on IRS advice
This penalty relief argument is typically unsuccessful and isn’t used much. You need to have documented erroneous advice from the IRS that you reasonably relied on, and the IRS doesn’t put tax advice in writing very often. The Internal Revenue Manual also states that the IRS allows penalty relief based on erroneous oral advice, but this is not seen much in practice.
3. Reasonable cause: providing a valid reason that you couldn’t comply based on your facts and circumstances
People argue all the time that they followed erroneous guidance of their tax software or tax professional. This type of argument falls under reasonable cause.
To successfully present a reasonable cause argument for late filing and payment, you must demonstrate that you exercised ordinary business care and prudence but couldn’t comply. You must also demonstrate that your noncompliance was not due to willful neglect.
Most people haven’t been successful with reasonable cause arguments before the IRS, especially in court. In fact, most determinations never get to court – they are administrative determinations made by the IRS.
To be successful in reasonable cause determinations, you’ll need to make sure that the IRS considers all your facts and circumstances. If you get a penalty abatement denial letter that doesn’t address all the facts and arguments presented in your request, you should request an appeal of the determination.
4. Administrative waiver: taking advantage of a provision that facilitates effective tax administration
Under certain conditions the IRS will provide administrative relief from penalties. The most widely available administrative waiver is first-time penalty abatement (FTA).
You can use the FTA to abate the failure to file, failure to pay, and failure to deposit penalties for one tax period if you’ve had a clean compliance history for the past three years. You can use FTA for penalties on Form 1040, Form 1120, and payroll and pass-through entities.
FTA is the easiest of all penalty relief options. You can request one by calling the toll-free number on your IRS notice. Additionally, you can have your tax professional can call the dedicated tax pro hotline or compliance unit (if applicable) to request FTA for any penalty amount.