Three Ways to Reduce or Remove IRS Interest from Your Tax Bill
People who owe the IRS owe more than taxes. On top of the tax bill, the IRS charges penalties and interest. That’s why it’s critical to get into a payment agreement with the IRS: As your balance grows, so does the interest.
So, it’s no surprise that people in this situation often ask the IRS to remove or reduce their interest. The IRS won’t remove interest most of the time – but if you’re proactive, you can minimize interest on your own.
Here are three ways to do it:
1. Reduce the tax
The first thing that you or an experienced tax professional should do is figure out why you owe the tax. There’s always a chance that the tax can be reduced or removed. And if you owe less tax, you owe less interest, too. Here are some common reasons people owe the IRS:
- CP2000 notice – The IRS sends a CP2000 notice when your tax return doesn’t match income information the IRS has about you. If you don’t respond, or if you respond incorrectly, the IRS will charge you the tax it thinks you owe, plus interest and possibly a penalty. First, you should figure out if the IRS is even correct about the tax it says you owe – then go from there. Here’s exactly how to handle a CP2000 notice.
- Incorrect or incomplete return – Consider asking a qualified tax professional to review your return to make sure it’s accurate and that you got all the credits and deductions you were entitled to receive. Find out more here.
- Unfiled returns – If you don’t file a return, the IRS can prepare a return for you (the IRS calls this a substitute for return). But the IRS will prepare your substitute return with only the income information it has on file about you from banks, employers, etc. That means you won’t get any favorable credits or deductions. If you file a return to replace the substitute return, you can reduce or even eliminate the balance you owe – including interest. Here’s how.
2. Reduce the penalties
When you get penalties reduced or removed, you also reduce the interest that goes along with them. There are four types of penalty abatement options:
- Reasonable cause
- Administrative waivers (most commonly, first-time penalty abatement)
- IRS error
- Specific legal exceptions to penalties
You should start by identifying which (if any) option you might qualify for. Then, submit your request to the right unit at the IRS. Here’s more about how to address IRS penalties.
3. Set up a monthly payment plan
The best way to stop interest from building up is to pay the full tax bill. But, if that’s not possible, you have options.
The IRS offers several types of installment agreements with different terms. A tax professional can help you evaluate which option will work best for you, and work with the IRS to set up the agreement. Learn about IRS payment options.
When will the IRS eliminate the interest?
The IRS may remove your interest if:
- The IRS made an arithmetic error.
- An IRS employee made a mistake or caused a delay.
For example, if an IRS employee lost your case file during an audit, the IRS may remove the interest that built up during the delay in completing your audit.
How to get expert help
An experienced tax professional can evaluate your specific facts and circumstances to determine if you qualify to lower your interest using any of these strategies.
Learn about H&R Block’s Tax Audit & Notice Services. Or make an appointment for a free consultation with a local tax professional by calling 855-536-6504 or finding a local tax pro.
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