One of the most common things we hear new clients ask is something along the lines of, "Can't you just have the IRS remove my penalties? I don't mind paying my taxes, but I don't want to pay the penalties or interest." It's incredibly important that you get this idea out of your mind, because it almost never happens to the extent that people are hoping for. It can definitely happen, but only under specific situations. What we can do is set our sights on something more plausible – finding a way to knock off a portion of the accrued penalties and interest.
The IRS Fresh Start Program has fooled a number of taxpayers with its claims to penalty relief. The IRS Fresh Start Program offers zero penalty relief. There is no such thing as IRS Fresh Start Penalty Relief. When seeking penalty relief, you're required to fit the same requirements and go through the same processes that have always been in place. It's a shiny new name, but there's nothing new for taxpayers. So, what we need to do is look at the circumstantial penalty reliefs that have been in place for some time.
First Time Penalty Abatement
There are a number of ways to get penalty relief; the first being an unspoken agreement on the part of the IRS to give first-time offenders a freebie. If it's the first time that you've filed or paid your return late, you're more than likely able to pay your tax liability in full and request to have the penalty removed. The IRS, for the most part, will honor such requests and waive the acquired penalties and interest. However, you absolutely have to be in current compliance for filing your tax returns and — if applicable — paying your estimated tax payments. You can have other tax liabilities, but you must not have had any penalties imposed in the three years prior to the year for which you're requesting the penalties to be waived.
For example, if you have eight years of owed taxes, you can request for the first year of penalties to be waived. However, as we just saw, this can only happen if the three years of prior returns (prior to the first year of non-compliance) were filed and paid on time. It's important to note that first-time penalty abatement applies to most types of tax penalties, but does not apply to any failure to pay your taxes by the EFTPS (Electronic Federal Tax Payment System) and also does not apply to one-time filing for items such as gift or state tax returns.
The second most common reason for penalty relief is reasonable cause. It's very difficult to navigate reasonable cause and requires a persuasive argument for your inability to pay your taxes. In this course of action, you have to prove that you were doing everything right and taking care of your obligations to the best of your ability at the time. But, despite your best efforts, you were unable to comply. This mostly happens with issues like serious illness or a death in the family that required your time and energy. You need to prove that the situation was beyond your control and kept you from filing your taxes in a timely manner.
Statutory exceptions are predicated on not what you have done, but on what external factors are doing. When Congress passes a law stating a type of penalty to be imposed, they give reasons for circumstances where the law would not be comprehensive. The most common exception is the understanding that mailing your tax return before the deadline counts as filing your return on time, even if the IRS does not receive the return by their deadline.
Due to external factors — think government slowdown, natural disasters affecting the post, and a variety of other possibilities — exceptions make sure that you're not being penalized for something out of your control. Being able to prove that you had mailed your returns on time is reason enough to remove the penalties and interest placed on your tax bill.
Administrative waivers are made up by the IRS as is necessary. Whenever a rule or filing requirement changes, the IRS might say that they will not impose penalties for a specific amount of time. This gives taxpayers a chance to adapt without being in noncompliance. For example, when EFTPS was first implemented, the IRS allowed a period of time during which penalties would not be asserted for failing to use EFTPS.
This form of penalty relief is put in place to make sure that people have sufficient time to make sure that they are in compliance. You can think of administrative waivers more as a preventative measure than a suitable reason for failure to file your returns.
You heard it right! Last, but definitely not least, is acknowledging that the IRS makes mistakes. Penalties can absolutely be removed if they were never supposed to be there in the first place. It's not entirely uncommon for people to mail their returns or extensions to the IRS and get charged with a late filing penalty due to the return/extension getting lost and never being processed. So, if you get a late-filing penalty and can prove that you filed on time and that it was their mistake, you can get the penalty removed.
While there may not be such a thing as IRS Fresh Start Penalty Relief, you better believe that there are ways to get penalties and interest waived. There's no magic wand, but with the right situation and proper application of knowledge, perhaps there is a greater relief that you imagined that is possible!