Taxpayers hate paying IRS penalties. Unfortunately, most taxpayers who are fined by the IRS do not request relief or are denied relief because they do not meet some basic recommendations. In some cases, it is not practical to request a post-filing remedy or a "reduction" of penalties. However, for two of the most common IRS penalties, relief is available if you follow a few simple rules to request and secure reduction.
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Before we jump right into the dos and don'ts of penalty reductions, let's learn and evaluate the most common penalties assessed by the IRS and why.
Common IRS penalties
There are more than 150 different IRS penalties for late filing, late payment, return errors, and other non-compliant activities. However, the three most common IRS penalties are related to late filing and late tax payment. The sanctions are:
Failure to present the fine: 5% per month on the balance owed, a maximum of 25%.
The estimated tax penalty: equal to the interest lost for not having sufficient withholding or for not paying estimated taxes during the fiscal year.
Failure to pay the fine: 0.5% per month of the balance owed, maximum 25%.
In 2019, these penalties constituted 95.5% of all IRS penalties for individual taxpayers.
IRS Individual Penalties: 2019
These penalties can be costly. The average amount of fines for 2019, for individuals, were:
Average IRS Penalty Assessments to Individuals: 2019
Relief from IRS penalties
The taxpayer can request exemption from penalties. In the event of failure to file or pay the penalty, taxpayers can request that the IRS “lower” the penalties. The reduction consists simply of eliminating the fines after the taxpayer is assessed. Non-Filing (FTF) and Non-Payment (FTP) of fines generally require a reduction because the IRS evaluates these fines electronically (that is, through its computer systems) when a return is filed or a transaction is made. in a balance due account.
Other penalties generally require different procedures to request relief. For example, the estimated tax penalty is generally not "lowered" by taxpayers. Rather, taxpayers can request an exclusion from the penalty when filing their tax return (people use Form 2210).
Other penalties are proposed during IRS audits and investigations, such as accuracy or fraud penalties, and generally require the taxpayer to deal with IRS auditors or appeals officers prior to assessing the penalty. Taxpayers can request the reduction of fines for accuracy in returns after their assessment, but the reduction process may require the use of special IRS procedures or take the IRS to court, all of which can take years to resolve.
Few penalties are reduced each year
In 2019, only 12% of FTF and FTP penalties were reduced. For all individual penalties, only 9% was reduced.
Individual IRS Penalties Reduced: 2019
There are several reasons for the low reduction rate. First, many taxpayers do not ask for a reduction. If you ask, the IRS commonly rejects many initial requests for abatement. Lastly, taxpayers cannot appeal the IRS adverse determination.
Taxpayers who wish to apply for a penalty waiver for FTF and FTP fines should follow some simple rules to increase their chances of success.
Increase your chances of reducing FTF and FTP penalties
For FTF and FTP penalties, the IRS has two main reasons why it reduces these penalties:
Reasonable Cause Relief (RC): When the taxpayer can show that they used ordinary care and prudence, but were unable to comply (file or pay on time) due to unforeseen circumstances beyond their control (a "reasonable cause" excuse for breach) .
IRS First Time Penalty Reduction (FTA) Relief - Can be used to reduce FTF and FTP penalties for a taxpayer in good standing (filed all returns, paid all taxes, or in an IRS agreement on taxes). balances due) with a clean-up compliance history (no penalties in the last three years prior to the penalty year).
When applying for FTF and / or FTP penalty relief, it is important to follow some of the best practices. Here are my to-do's and don'ts when applying for reduced FTF and FTP penalties:
The "do's":
Always use the FTA - all first-year penalties, regardless of whether the taxpayer qualifies for a reasonable cause reduction, receives FTA. As such, taxpayers, if they qualify, should always call the IRS and request the reduction of any FTF or FTP penalties that qualify for FTA. All FTA applications can be made over the phone, regardless of the amount of the fine imposed.
Request reasonable cause in writing - Taxpayers often try to call the IRS to request a penalty reduction. This works all the time for FTA. However, telephone requests rarely work for reasonable cause attenuations. Taxpayers can complete Form 843, Claim for Refund, and attach their justification and evidence to support their reasonable cause claim. Note: The IRS will accept Form 843 or a letter from the taxpayer. I prefer Form 843 because it contains the minimum requirements to identify a request for a fine reduction.
Appeal Adverse Determinations - Many IRS penalty reduction determinations do not consider the totality of the taxpayer's circumstances. If any of the criteria, on their own merits, does not qualify the taxpayer for the reduction, the other reasons are ignored. This occurs because the IRS has a computerized tool to assist in fault reduction determinations. Many reasonable cause requests are rejected due to this faulty IRS tool. Taxpayers should request an appeal so that a living person can hear all of their circumstances and make an informed decision.
Be sure to include these items in a reasonable cause reduction request: First, clarify the specific circumstances that were beyond your control that caused the non-compliance (illness, disability, loss of records, etc.). Second, be able to show how other situations in your life were affected by reasonable cause. For example, the illness that caused you not to apply on time may not allow you to work either. Lastly, be sure to provide specific evidence and a timeline of events for the period of default. For example, a chronology of an illness and a letter from a doctor showing your inability and inability to perform normal activity is great evidence to support a reasonable cause due to illness.
Demonstrate prior compliance: IRS Policy Statement 20-1 states that the IRS must use penalties to deter non-compliance. Taxpayers who have a one-year isolated incident that does not qualify for the FTA exemption should be prepared to show their prior compliance history that is consistent with the Policy Statement in their reasonable cause argument. They should also be prepared to explain any small amount of penalties from the previous year. Here's a common example: A taxpayer has reasonable cause for late filing for 2018, but does not qualify for FTA due to a small FTP penalty on a 2015 return. If this taxpayer has reasonable cause for late filing, it should highlight your past compliance history and explain the little FTP circumstances in a previous year. A prior positive compliance history will weigh in favor of reasonable cause reduction for the 2018 return.
Tracking Reduction Requests: Unfortunately, many IRS penalty reduction requests get lost within the IRS. Abatement requests cannot be traced on an IRS transcript. How does a taxpayer know if the IRS is actively working on her application? They have to call the IRS. If the IRS does not have your request for abatement, you will need to resubmit it. Taxpayers with multiple lost applications should go to the Taxpayer Advocate office to intervene. The Taxpayer Advocate cannot make the reduction decision, but can make sure that the request for it is not lost again. Another important action: If the penalty is not paid, taxpayers should make sure the IRS has put a "collection hold" on their account while the reduction request is being processed.
The "Dont's":
Don't pay the penalty: Paying the penalty before requesting reasonable cause can eliminate an important avenue of appeal from the IRS: the collection due process or “CDP” hearing. Taxpayers who have an unpaid balance may eventually request a formal CDP hearing on an unpaid fine. At a CDP hearing, the IRS will carefully consider a request for a penalty reduction, increasing the chances of reduction. Additionally, CDP hearings have another advantage: they can take much less time than informal hearings for penalty reduction appeals from the IRS Service Center.
Don't use these two reasonable cause excuses for the FTF: The IRS will reject any reduction in the FTF penalty based on a pro-tax dependency and financial hardship. The IRS has strong support for these decisions based on court rulings. FTF abatement requests using these criteria receive a quick adverse determination letter from the IRS and little consideration of IRS appeals.
Do not forget to request the reduction in a timely manner before the statute expires: taxpayers can request the reduction of penalties within the statute of limitations of normal refund, which is 3 years from the date the return was filed or 2 years after the fine was paid. In the past, the IRS has sometimes allowed reductions after the expiration date of the refund status. However, the IRS has fixed this system flaw and most applications outside of these deadlines are rejected by the IRS. Taxpayers who complete an IRS installment agreement and qualify for FTA must request penalty reduction by FTP within 2 years of the payment agreement.
Time expectations
Successful reduction of the penalty may take some time. FTA can be approved over the phone instantly. However, the final reduction of the sanction will take place in about 3 weeks. Taxpayers should always review their account to make sure the IRS correctly removes the penalty. Taxpayers can review their account transcript for the years in question to verify the reduction.
Reasonable cause mitigation can take a considerable amount of time, depending on whether an appeal is needed. Initial requests for penalty reduction generally take 2-3 months for an initial determination. If an appeal is required, you can add 6 to 12 months to the process.
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