Navigating tax penalties can be a daunting task for taxpayers, but understanding your options for penalty relief can make a significant difference. The Internal Revenue Service (IRS) offers two primary forms of relief: the First Time Penalty Abatement and Reasonable Cause waivers. Both can provide a reprieve from penalties, but they have different requirements and applications. With the abatement, taxpayers can avoid hefty penalties, which can sometimes snowball into larger financial issues.
Penalties Eligible for First Time Abatement
Penalties eligible for First Time Abatement include:
- Failure to file a tax return,
- Failure to pay the tax due shown on a return by the due date or required to be shown on a return, but was not, and that tax was not paid by the date stated on the notice or demand for payment,
- Failure to deposit the tax due in the correct amount within the prescribed period and/or in the required manner
The First Time Abatement relief does not apply to returns with an event-based filing requirement, the daily delinquency penalty, or information reporting that is dependent on another filing.
Who Qualifies for First Time Abatement
Taxpayers may qualify if they have a history of good tax compliance. A taxpayer is considered to have a good tax compliance history if:
- Filed the same return type, if required, for the past 3 tax years before the tax year you received the penalty.
- Did not receive any penalties during the prior 3 years, or any penalty was removed for an acceptable reason other than First Time Abatement.
Penalties Eligible for Reasonable Cause Relief
Penalties eligible for Reasonable Cause relief include:
- Failure to file a tax return,
- Accuracy-related penalties,
- Information return penalties
Reasonable Cause is determined on a case-by-case basis considering all the facts and circumstances of your situation. Reasonable cause does not apply to certain penalties such as the estimated tax penalty.
Who Qualifies for Reasonable Cause Relief
Reasonable Cause waivers are granted when taxpayers can demonstrate that they acted with ordinary care and prudence but were unable to comply with tax laws due to circumstances beyond their control. Taxpayers must provide evidence of the circumstances that led to the failure to comply and demonstrate that they made efforts to comply with tax laws despite the circumstances.
How to Request First Time Abatement or Reasonable Cause Relief
Taxpayers should follow the instructions in the IRS notice they receive. In some cases, some penalty relief requests may be accepted over the phone. Taxpayers can call the number listed on the notice received to speak to an IRS agent. During the call, if you apply for Reasonable Cause but the IRS determines you qualify for First Time Abate, they’ll apply the latter. If you do not qualify for either or the IRS cannot approve your relief over the phone, you can request relief in writing. When requesting relief in writing, taxpayers should send a written statement or Form 843, Claim for Refund and Request for Abatement.
If you have any questions about applying for the First Time Penalty Abatement, Reasonable Cause relief or where to start, please reach out to a member of our team.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.