How to waive – not pay – IRS penalties
Taxpayers who face an IRS penalty this year are not alone. The IRS could assess more than 40 million penalties to taxpayers, totaling almost $25.6 billion in a single year.
In some situations, taxpayers may miss out on an opportunity to have their penalties removed, just because they do not know to ask for a waiver. In fact, in 2010, 91 percent of failure-to-pay penalties that qualified for first-time penalty abatement weren’t waived – likely because taxpayers were unaware of the option.
First-time penalty abatement has been around since 2001. It allows taxpayers to request that the IRS remove their penalties if the taxpayers typically comply with their tax responsibilities and have not faced certain penalties within the past three years. This waiver can save a taxpayer hundreds, or even thousands, of dollars.
The most complex part of first-time penalty abatement is determining whether the taxpayer qualifies. Only certain penalties and certain returns are eligible, and the taxpayer must meet the IRS’s clean compliance criteria. Individual taxpayers may be able to have penalties waived if they:
- face failure-to-file and/or failure-to-pay penalties on their individual tax return,
- do not have failure-to-file or failure-to-pay penalties in the previous three years on their individual tax return, and
- filed all required tax returns for the past three years.
For example, taxpayers who missed the April 15 deadline (without any extensions) and owed $2,500 on their federal return would face failure-to-file and failure-to-pay penalties. If they filed their return two months late, those penalties would reach $250, on top of their $2,500 federal tax liability. If they filed their return a year late, these penalties would add $775 to their tax bill. If the taxpayers qualified for first-time abatement, the entire $1,025 in penalties would be eliminated. (The taxpayers would still owe interest on the unpaid taxes.)
A second, second chance?
Taxpayers who are granted the first-time abatement waiver won’t be eligible for it again in the next three years. However, taxpayers may be eligible for other types of IRS penalty abatement, such as removal due to reasonable cause, IRS error, statutory exception, or another type of administrative waiver.
Taxpayers or their tax professionals can request first-time abatement by phone or in writing, but if they face a larger penalty, they should submit their request in writing. If taxpayers need help understanding the eligibility requirements or how to work with the IRS to request the waiver, their local tax expert can help them navigate the process and potentially save them IRS penalties.
Learn what to do if you received one of the more than 4 million CP14 balance due notices the IRS is sending this summer.
Penalties for not filing a tax return or not paying taxes are well-known, but there are many more tax penalties. Knowing how to avoid them when possible, and minimize them when unavoidable, is key.