Just how forgiving is the IRS?
Many people that owe back taxes to the IRS ask us whether or not they'll be able to get the IRS to agree to forgive the penalties and interest that have been accruing on the tax debt. It’s a fair question and a valid concern. Interest and penalties often times can accrue rapidly, especially in instances where someone failed to file a return that had a significant balance owing for quite some time.
Unfortunately, I have to break the bad news that in most instances there isn’t a whole lot that can be done to abate penalties and interest. An Offer in Compromise is typically the best way to “abate” the penalties and interest, but you’re not really abating the penalties and interest. You’re simply settling the total debt for a portion of what’s owed, including penalties and interest.
Short of an Offer, there’s not much that can be done to avoid paying interest that has accrued on the liability. Certainly one could amend their return (or file an original return to replace a substitute return that the IRS has prepared on their behalf) in order to reduce the tax owed. Once the original tax liability is reduced, the IRS will re-compute the interest owed based on the lower liability amount. This is of little use to taxpayers who are stuck paying interest on a liability that was accurately assessed.
The only other way to avoid paying interest that has accrued is to wait out the IRS’s 10 year collection window. However, if you’re reading this post you probably understand the voracity with which the IRS will attempt to collect on a debt before their collection window expires. Planning to ride out the 10-year collection window is rarely a viable option, and shouldn’t be considered without a thorough assessment of the state of one’s liabilities and other resolution options that may available.
Reasonable cause abatement
The IRS has a bit more leeway when it comes to the abatement of penalties than it does with interest, however.
One options is "reasonable cause". In my experience, the IRS’s threshold for what constitutes reasonable cause is a very high bar to clear – it would generally require the hospitalization of a taxpayer or their immediate family member or some kind of disaster situation that prevented the taxpayer from being compliant in their obligations. In addition, once the circumstance that gives rise to a reasonable cause exception has subsided, the IRS expects taxpayers to immediately take action to come back into compliance. If the taxpayer delays at all in filing an outstanding return or paying a balance owed, the IRS has grounds to refuse to grant a reasonable cause abatement. In my experience, very few taxpayers will qualify for reasonable cause abatement.
Qualifying for First Time Penalty Abatement
About 95% of taxpayers that are eligible for First Time Penalty Abatement do not request it, and you’d better believe that the IRS will not go out of its way to make it known that a taxpayer might be eligible for First Time Abatement.
Under First Time Penalty Abatement, the IRS will abate the penalties for failure-to-file, failure-to-pay, and (in the case of businesses) failure-to-deposit penalties associated with the taxpayer’s first year of non-compliance. Two conditions need to be met in order for a taxpayer to qualify for first time abatement:
- The taxpayer was not required to file a return or has had no prior penalties for the preceding 3 years to the one in which they are requesting first time abatement, and
- The taxpayer has filed, or filed a valid extension for, all currently required returns and paid, or has arranged to pay, any tax due. Logic would suggest, therefore, that if a taxpayer has filed all required returns, there must be some year that is eligible for First Time Penalty Abatement, as there is always going to be a first year of non-compliance.
How much could you potentially save?
You can only request First Time Abatement over the phone or in writing. It is not clear whether there is an upper ceiling on the amount that the IRS will abate through First Time Penalty Abatement, however experience has shown that they will abate penalties of under $10,000 over the phone. For amounts larger than that, they may require a request for abatement be made in writing.
Even if it has been a number of years since a taxpayer has been compliant with their filing and payment obligations, First Time Abatement may still be useful in reducing the balance owed to the IRS. While you have only three years to request a refund from the IRS, First Time Penalty abatement operates as a credit to your account and is therefore not bound by IRS limitations on refunds. Even if a taxpayer’s first year of non-compliance was 10 or more years ago and the balance associated with that year has been completely paid off, the IRS can abate the penalties associated with that tax year and credit a more recent liability.
First Time Penalty Abatement is therefore an extremely useful tool tax practitioners have to save clients money. It is impossible to say without conducting an investigation of a client’s tax account transcripts how much they might be eligible to save, but it is almost always worth the phone call to the IRS to make a request. In nearly all instances it’s a great way to add value to a representation and can often serve as the cherry on top of a negotiated IRS resolution.
If you need assistance with a tax issue, contact us. We can help. Call us at 888-727-8796 or email email@example.com.