If you don't ask, you don't get!

I am writing a new book. It is a guide (not a treatise) to help people and businesses in trouble with the IRS. Here is a draft of the chapter on getting rid of IRS penalties and interest. I hope you get a benefit from the information.

Chapter 11

Can You Get Rid of Your IRS Penalties and Interest?

Back in the good ol’ days, there were very few types of penalties and interest. Currently, by one estimate, there are now over 250 penalties and associated interest. 

Here is a sample: https://www.irs.gov/pub/irs-utl/6209-section10-2012.pdf

The IRS used to use them as a slap on the wrist for not filing and paying your taxes on time. Now, the IRS uses them as a bludgeon to beat you into submission. We will talk about penalties first, then we will talk about interest separately.

Penalties

There are two types of penalties that are the most common. Failure to File (FTF) penalty and Failure to Pay (FTP) penalty.

FTF penalty accrues at 5% per month multiplied by the tax amount due and is capped at 25%. FTP penalty accrues at ?% per month times the tax amount due and is capped at 25%.

FTF starts from the due date of the return and ends when the return is filed or when the penalty reaches 25% of the tax due, whichever comes first. FTP starts from the due date of the return and ends when the tax due is paid or the penalty reaches 25% of the tax due, whichever comes first.

Putting the two together, after 2 years your tax bill could be 50% bigger than it was when it was originally due. This can be completely overwhelming. There is hope though. Keep reading.

Interest

What about interest? Unpaid taxes accrue interest. Penalties also accrue interest. Unpaid interest on tax and interest on penalties are two separate things. Maybe you are getting the feeling that this can be completely overwhelming and insurmountable. It can be, especially if you let it keep building instead of getting help—NOW! So, what can be done about this “quicksand pit” of penalties and interest?

Penalty Abatement (forgiveness)

There are two methods to get penalties abated (forgiven) head on. First Time Abatement (FTA) is one, and the other method is abatement for “reasonable cause.” Also, the interest associated with the penalties can be abated (not the interest on the taxes due). Don’t allow the big marketing firms to lie to you and tell you that they can get rid of ALL of your interest along with the penalties. They can’t. Simple.

First Time Abatement

FTA is available to taxpayers that have been compliant with their filings for the most recent 3 years. That means you cannot have been late or incurred penalties in the last 3 years. If your record is clean, you can request the penalty to be abated and your request will be automatically granted. 

In some cases, it is a better strategy not to use your FTA opportunity till a later time. This is mainly because your tax account can be solved under another method and/or you anticipate an even bigger penalty for being late again because of a foreseeable large tax bill or financial problems.  More on this later.

Reasonable Cause

You can get the IRS to abate (forgive) penalties (and the related interest), if you can show what the IRS defines as “reasonable cause.”

In plain English, and not in technical IRS-speak, here is a list of acceptable reasons for which the IRS may grant penalty (and associated interest) forgiveness:

I don’t have any money

I was sick

I got divorced

I had to file bankruptcy

I lost my job

I had a gambling problem

I had a substance abuse problem

My house was foreclosed on

I am a senior citizen

My kids were in the hospital

I had diagnosed depression

My creditors got a judgement against me and garnished my wages

I did not know how to file my tax returns

I can’t find my W-2

My tax records were lost or destroyed

The IRS or my tax preparer gave me bad advice when I called them

I did not think I was required to file because I didn’t think I made enough money

I did not understand the tax laws

When requesting penalty abatement, you can list as many reasons as are applicable to you. You do not have to give just one reason. So, make a list and expand on the reasons with the facts about what was going on in your life during the time when you failed to file or pay. List the tax years and list the reasons with the facts. 

Be precise. Lengthy narratives will not likely be read or endear you to the IRS examiner reading your statement. Less is more. Be concise, polite, genuine, and truthful. But make them cry.

Penalty abatement requests (and almost all correspondence with the IRS) should be sent certified mail "return receipt requested." Yes, the IRS does lose things. CYA!

Final Thoughts on Penalty and Interest Abatement

Penalty and Interest abatement is a proven method to get your tax bill down. This is an important strategy if are paying in full, or if you qualify for an Installment Agreement but not an Offer in Compromise.

Clients often get their penalties and associated interest abated in such large amounts that it more than pays for the retainer for tax resolution help. In short, they can pay the IRS or they can pay for professional representation and save money at the same time.

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