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How to Reduce IRS Penalties and Interest

how to reduce irs penalties and interest

Each year, millions of Americans fall behind on their taxes, which results in significant penalties and interest. The Internal Revenue Service estimates over 14 million Americans owe over $458 billion in back taxes, penalties and interest. If you don’t file your taxes by the April 15th annual filing date, you are subject to pay far more than the amount of taxes you owe.

As a taxpayer, when you face large tax liabilities, your debt increases significantly due to added penalties and interest. The penalty for filing late is typically 5 percent (5%) of the unpaid taxes for each month, or part of a month, that a tax return is late. The penalty begins the day after the filing due date but will not exceed 25 percent (25%) of your unpaid taxes. This penalty is one of over 100 possible penalties that a taxpayer may pay when they fail to file on time.

Tax penalties are mandated by the U.S. Tax Code and the majority fall into one of two categories: Collection or Accuracy Related. Collection penalties are the ones previously mentioned. They include late filing, late payment and late federal tax deposit penalties. Accuracy related penalties are most commonly due to negligence of understated taxes or substantial understatement of taxes. In addition to owing the taxes and the penalty, you will be charged interest. Interest not only accrues on unpaid taxes; interest is charged on the penalties themselves.

When you owe back taxes, it is very frustrating. When you consider the additional expense of penalties and interest, it can become overwhelming quickly. The good news is that you can apply for partial reduction or full elimination of the penalties and interest owed on your back taxes. This is a process the IRS calls ” an abatement.” An estimated one-third of all tax related penalties are abated.

Reasonable Cause

When you apply to have the penalties and interest removed from your back taxes, the IRS applies a standard of Reasonable Cause. You must prove to the IRS you had a good reason for not filing or paying your taxes on time. The IRS will consider reducing a penalty if one of the following occurred:

  • Death, Serious Illness, or Unavoidable Absence
  • Fire, Casualty, Nature Disaster, or Other Disturbance – Major Disasters
  • Unable to Obtain Records
  • Mistake was Made
  • Ignorance of Law
  • Forgetfulness
  • Statutory Exceptions or Waivers
  • Undue Hardship
  • Written Advice from IRS
  • Oral Advice from IRS
  • Advice from Tax Advisor
  • Official Disaster Area
  • IRS Error

First-Time Penalty Abatement

If you have not previously had any issues or delinquencies with the IRS, you may be eligible for a First-Time Penalty Abatement (FTA) waiver. This is an administrative waiver relieving taxpayers from failure-to-file, failure-to-pay and failure-to-deposit penalties if certain criteria are met. The FTA waiver was designed to help individuals and businesses who made one mistake but otherwise have a clean record. It’s important to note that taxpayers can only request a FTA waiver for failure-to-file, failure-to-pay or failure-to-deposit, not accuracy-related and other types of penalties.

According the the IRS Penalty Handbook, to qualify for the FTA waiver, you must meet the following criteria:

Filing Compliance: You have filed all current returns or filed a valid extension for all currently required returns.

Payment Compliance: You have paid or arranged to pay any tax due.

Clean History: You have no prior penalties (except the estimated tax penalty) for the preceding three years.

Requesting A Penalty Abatement 

If you receive a tax notice with penalties, it’s important to request an abatement as soon as possible. You have two options when requesting a removal of IRS penalties. You can either represent yourself in front of the IRS or ask for help from a licensed Tax Representative. For all abatement requests, the IRS will want to know what it is you’re specifically requesting and the reason why. You’ll need to meet the standards of reasonable cause and cite the procedural sections that apply to your situation.

You will also need to include any documentation to support your reason. This could include a letter from your physician describing the medical condition, which prevented you from filing on time, or a report from the fire department describing your home disaster. Regardless of the reason you failed to pay or file your taxes, you’ll need to have the proper documentation to back up your claim.

When seeking to reduce or remove IRS tax penalties, it’s always best to have a Tax Representative handle your case. When you work with a Tax Representative, they will conduct an in-depth review of your tax transcripts to identify the penalties and interest assessed against you. They will then take over your entire case and all correspondence with the IRS. As a Tax Representative, they not only have the option to send a letter on your behalf, they have access to the IRS Practitioner Penalty Service (PPS). The PPS is a professional support staffed with IRS customer service agents who are trained to handle questions from Tax Representatives regarding client accounts. PPS is only available to tax professionals with valid third party authorizations.

If the IRS denies your request for abatement, you can submit a formal appeal. Your Tax Representative will handle the entire appeal process on your behalf. They will prepare and submit the formal appeal as well as represent you in front of the Appeals Division.

Removing Interest

Unfortunately, it is not as easy to get interest removed from your tax bill unless the IRS made an error. The Tax Code only authorizes the IRS to remove interest under very limited circumstances. However, if the tax penalty is abated, the related interest on that penalty will also be removed. If the interest was added due to delays by the IRS, it may also be removed.

If the IRS determines you will never be able to fully pay tax and interest charges, they may accept an Offer in Compromise, also known as a tax settlement, which would allow you to pay less than the full amount. In certain scenarios, if you declare bankruptcy, your interest, taxes and penalties may be reduced or eliminated.

Conclusion

If you’ve received a penalty notice from the IRS, let Landmark Tax Group help. Not only will we work to remove the penalties and interest from your account, we will use our Preventative Approach to ensure you have the knowledge and information you need to prevent penalties and interest in the future. As licensed Enrolled Agents, Tax Relief Specialists, and former IRS Agents , we know how the IRS works and how to protect you and your assets. Request a FREE consultation with our ex-IRS agents here or call us today at (949) 260-4770.

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