Penalty Abatement: A Strategic Approach
Tax Penalties imposed by the IRS are nothing to joke about. They can add up faster than the interest on a credit card. And the IRS seems to be surprisingly creative when it comes to inventing new fees, penalties, and interest payments.
All of this, of course, is piled on top of whatever tax debt the IRS feels you already owe. Sometimes it can add up to far more than your original tax bill.
Luckily, you can reduce, reverse, or even wipe out some or all of these penalties. This is known as penalty abatement. In 12 years of working on IRS penalty abatement tactics, I’ve developed a strategic approach that could spare you a lot of unnecessary tax penalties.
IRS vs. You: The knowledge advantage in penalty abatement cases
The IRS agent who is handling your case is probably busy with many cases, and he or she might overlook important details of your financial statement.
An experienced tax attorney will probably be just as familiar with the relevant laws as the IRS agent on your case. And your tax attorney can know more about you and your financial situation.
This knowledge advantage makes it possible to find an opening for penalty abatement.
The first step is to determine why the IRS assessed a penalty, and look for the mistakes they might have made.
Taxpayers are usually penalized for one of three possible situations: A mistake on the income tax return, filing returns or paying taxes late, or fraud.
If the IRS has accused you of one of the first two causes, it may be very easy to wipe out your tax penalties. In the case of fraud, you may be able to obtain penalty abatement by demonstrated that you acted in good faith to the best of your knowledge.
With the help of a tax attorney, you can sometimes get penalty abatement fairly quickly and easily. This is because the IRS is notorious for making mistakes in their records. You may have reported your income truthfully, but the IRS claims you made an error.
If this is the situation, a tax attorney can request your records from the IRS, prove that you were correct, and remove your tax penalty.
Likewise, if you file your income tax return late or make late payments due to an IRS error, a tax attorney can probably help you. It’s a simple matter of obtaining the records, pointing out the fault, and requesting penalty abatement.
Sometimes, however, the government hasn’t made any mistake. This doesn’t necessarily mean you can’t get penalty abatement. This just means your tax attorney will need to go to the second phase of a penalty abatement strategy.
At this point, the reason for assessing the penalty is accurate, but you can still demonstrate that you don’t deserve it.
If there were special circumstances that made it difficult or impossible to file your tax return accurately and on time, your tax attorney can make this argument to the IRS. This part of the penalty abatement strategy is called “Reasonable Cause.”
For example, a major life event such as a divorce, a death in the family, or relocating could cause you to lose or misplace your tax records. A fire, flood, or burglary could have the same result.
In fact, the IRS definition of reasonable cause is fairly open and broad. You just have to demonstrate that your good faith efforts were thwarted. If you made a sincere effort to file accurate returns and pay your tax on time, an experienced tax attorney may be able to obtain penalty abatement for you.
Finally, if your efforts at penalty abatement still don’t succeed, you have one last refuge: An Offer In Compromise (OIC).
An OIC is essentially a deal with the IRS. You convince them that you can’t or shouldn’t pay your entire tax bill, and offer to settle the case by paying a lower amount. If your offer in compromise succeeds, your initial tax bill will be reduced, and penalty abatement is often a part of the deal.
All of these tactics depend on strict record-keeping and timely follow up. You need to know the relevant laws as well as the IRS revenue officer who is handling your case. And you have to know your own financial record even better.
This is why an experienced tax attorney can help you win penalty abatement. A tax attorney will focus on the details of your case, while the IRS agent is dealing with multiple cases.
Ultimately, this attention to detail is your best chance at penalty abatement. If you can catch the IRS making an error, or prove that you were held up by circumstances beyond your control, then your tax attorney can probably obtain penalty abatement for you.