What is a Penalty Abatement?

by Harry Galstian

May 17, 2013

Direct Tax Relief can successfully negotiate with the Internal Revenue Service (IRS) to have penalties removed from your account. The Internal Revenue Code allows penalties and the associated interest to be abated by the IRS if the taxpayer can show reasonable cause.

Reasonable cause is usually defined as but not limited to: if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to pay or file within the prescribed time.  Some examples of reasonable cause include:

  1. Major family problems that you can prove, such as a divorce
  2. Theft or destruction of your records and documents
  3. A major illness to yourself or immediate family
  4. Incarceration or a major disruption to your life
  5. Bad advice from a tax expert
  6. A natural disaster (hurricane, wind storm, fire, flooding, riot, etc.)
  7. Lengthy time of unemployment
  8. Death of a close family member

Keep in mind this is not a complete list but just a few reasons for reasonable cause.

Eliminating these penalties may lift a huge financial burden off of you since most of the time the penalties make up 25 – 30% of the total tax debt amount owed.

Even if your account is paid in full, the IRS will refund you the penalties and corresponding interest once your Penalty Abatement is approved.

Three of the most common penalties that are assessed to individual taxpayers by the IRS are Failure to File Penalty, Failure to Pay Penalty and Failure to Pre-Pay Tax Penalty.

  • Failure to File Penalty is calculated based on the period from the due date of your tax return (including any valid extensions) to the date the return is filed by the taxpayer.
  • Failure to Pay Penalty is calculated based on the amount of tax owed.  The penalty is calculated from the original payment date of April 15.  Many taxpayers are not aware that an IRS extension obtained by April 15 is only an extension to file; it does not give the taxpayer additional time to pay the tax liability.
  • Failure to Pre-Pay Tax Penalty is assessed when proper estimated tax payments are not made throughout the year.  Estimated taxes are quarterly payments mailed to the IRS for taxpayers that are self-employed or any taxpayer who does not have sufficient withholdings taken from their income sources.

Another common penalty assessed by the IRS is the Failure to Deposit Penalty.  This penalty is assessed on business accounts when payroll deposits are made late.  If the payroll withholdings collected by the business are not sent to the IRS, then the individual(s) responsible are in danger of having the Trust Fund Recovery Penalty assessed.

There are literally hundreds of additional penalties for Individual taxpayers, Corporations, Partnerships, LLCs, Trusts and Non-Profits. Direct Tax Relief is an IRS tax debt relief company and can help determine your eligibility for IRS penalty abatement. If you owe more than $10,000 in back taxes, contact us for a free, no obligations tax resolution analysis