When you file your tax return late or pay late, the IRS charges you late filing and late payment penalties plus interest. If you fail to resolve your tax debt quickly, penalties and interest can easily grow to be a significant portion of the total amount owed to the IRS.
Fortunately, the IRS can grant you penalty relief for various reasons. Our discussion will focus on First Time Penalty Abatement (“FTA”). The requirements for qualifying for FTA are as follows:
- Filing compliance-You must have filed all required tax returns.
- Payment Compliance-You must have paid or arranged to pay (through an installment agreement) all your taxes.
- No prior penalty history-You have no penalties for the preceding three years (except estimated tax penalties). If you’ve had a penalty abated for reasonable cause in the past, you may still be granted FTA.
Any interest charged on the abated penalties will also be removed.
The following example is based upon an actual case we recently closed:
A taxpayer came to our office who had submitted an offer-in-compromise prepared by another tax resolution firm that was rejected by the IRS. The IRS believed the taxpayer could fully pay the amount owed (for tax years 2011 and 2012) within the remaining statute of limitations. After questioning the taxpayer and reviewing the offer documents, I concurred with the conclusion reached by the IRS.
We determined the best course of action to resolve the taxpayer’s back tax debt was to establish a six year installment agreement (payment plan). The amount of the monthly payment was within her budget and thus manageable.
As part of our standard procedures we analyzed her tax transcripts looking for late filing and late payment penalties. We found the IRS had assessed approximately $4,600 of such penalties for the 2011 tax year. No penalties were assessed for the three years prior to 2011.
Since the taxpayer had (1) filed all her returns, (2) made arrangements to pay her back taxes for 2011 and 2012, and (3) had no prior penalty history for the three preceding years, she was eligible for First Time Penalty Abatement in 2011. We contacted the IRS and they removed the $4,600 of penalties plus an additional $700 of interest, a total savings of $5,300. Needless to say, the taxpayer was extremely happy with the reduction in tax debt.
If you have incurred IRS penalties, you may qualify for penalty relief under the First Time Penalty Abatement rules, or alternatively, you may qualify due to a reasonable cause exception. Call us today to learn if you’re a candidate for IRS penalty relief.