If your request for the First-Time Penalty abatement fails the next course of action is Reasonable Cause Penalty Abatement.
The taxpayer or Enrolled Agent would submit a written request for penalty relief based on a reasonable cause.
Accepted Reasons for Penalty Abatement:
- Natural or man-made disasters.
- A taxpayer’s death, serious illness, incapacitation.
- Tax preparer errors.
- Bookkeeper/accountant fraud or embezzlement of funds.
- Erroneous oral or written instructions or advice furnished by the IRS.
- Financial hardship.
Even if any of these situations have occurred you could still be turned down by the IRS. In that case you would have the option of filing an appeal.
When a taxpayer owes a substantial amount of money, it is a very stressful situation. This could affect your family, marriage and friendships. Dealing with the IRS in these situations can be stressful and intimidating.
This is where Enrolled Agents come in handy. We are enrolled to practice before the IRS. We take the stress away and handle the situation for you. We understand all the available options in these situations.
You may see the famous commercials that state “pennies on the dollar.” Sounds great, doesn’t it? This is not reality. The only time that can possibly happen is if the taxpayer is insolvent.
These firms have you pay them at least $5K, insist you pay them first and not pay the IRS. They tell you they can settle your case for little or no payment. It very rarely happens that way!
It is not uncommon for a taxpayer to fall behind in their taxes. They may have started a new business did not pay estimated taxes during the year, or self-employment income has increased substantially from the prior year. Or, one spouse was unaware that the other spouse had not been paying the taxes.
Whatever the reason for delinquent taxes, there is always a remedy to alleviate the situation. Some or all of the penalties may be abated and in most cases the taxpayer will be on a reasonable payment plan.
The first line of defense is having your Enrolled Agent request first-time penalty abatement from the IRS. This is an administrative waiver of failure to file/failure to pay penalties assessed against individual income taxes, business taxes and payroll taxes.
The first-time penalty abatement can only be received once for each type of qualifying tax, and only for one tax period. The taxpayer must have a clean record for three years to be considered for this type of penalty relief. In addition, all of your tax filings must be current.
Your request must be made within two years of the date that the balance was paid on the requested tax period or within three years (including extensions) of the date that the tax return was due.
The types of penalties that are not eligible for the first-time penalty abatement are: failure to pay estimated taxes, accuracy-related penalties, fraud penalties, civil penalties, or bad check penalties.
In a later article, I will discuss Reasonable Cause Penalty Abatement.