Dealing with tax debt and the penalties that come with it can be overwhelming. The IRS estimates that the number of taxpayers penalized for miscalculating or underpaying their taxes has risen to nearly 40%, so you are not alone if you are in this situation.
When you owe money to the IRS, the collection process and accompanying penalties can be intimidating, but this is certainly not something you can put off forever. It’s important to resolve any tax issues before the IRS takes extreme measures to collect your debt through an enforced collection, such as levying bank accounts, garnishing wages, or even seizing your assets.
What is Penalty Abatement and Adjustment?
In most tax debt cases, the penalties and interest portion are high. But you might be able to get some of these penalties removed through penalty abatement or adjustment.
Penalty abatement or adjustment can occur if there is a reasonable cause which can be but is not limited to:
• A death in the family
• A medical emergency
• An error caused by an IRS employee
• Mailing your tax return or payment on time, but sending it to an incorrect address, or with the wrong value of postage that contributed to a delay
• The destruction of records attributed to a natural disaster or another catastrophe (i.e., if your house burns down or is flooded)
To qualify for penalty abatement, you must meet three basic criteria:
1. No IRS penalties for the three prior tax years. The IRS will only consider penalties which are over $100. So, if you only received a $50 penalty in one of the previous three years, you can still qualify for penalty abatement.
2. You have properly filed all your tax returns or tax extensions. If you have outstanding paperwork, you won’t be eligible, so before you apply, make sure that your filing is up-to-date with the IRS.
3. You have made payment arrangements on any outstanding tax debt you owe. If you haven't paid in full, then you at least need to have set up a tax payment plan with the IRS. If you have arranged to be on a payment plan, then you are expected to pay regularly.
Taxpayers may apply for first-time penalty abatement online, in writing, or by calling the IRS directly. If you qualify, the IRS may either remove the penalties immediately, or agree to remove the penalties, but only when the tax debt is paid in full. If the IRS refuses to remove the penalties right away, you will continue to see the penalties growing. If you qualify for abatement, the penalties will be removed eventually.
How Much Can Be Abated?
The IRS only removes penalties incurred in the first year. There is a monetary limit on several penalties that can be removed. The agency has not published this limit, but it appears to be up to $10,000.
How to Write a Penalty Abatement Letter
Although you can certainly write your own letter to request IRS penalty abatement, if you want to increase the chances of your request being accepted, it may be advisable to have a tax professional assist you.
If you are requesting a specific penalty abatement for more than one year, you will have to prove reasonable cause, such as:
• The death of a family member or very close friend
• An unavoidable absence, such as being in rehab or jail
• If you were held hostage in another country
• Destruction of your tax records due to fires, floods, or other casualties
• If you could not make payment or deposit due to civil disturbance such as a mail strike or a riot
• If you were unable to determine the amount of tax for reasons beyond your control
• If you received incorrect advice from a tax professional who is considered competent and trustworthy
You can use this penalty abatement letter template we created as a guide (download the Word document here). Also, make sure that you send copies of your supporting documents rather than originals, since the IRS is notorious for mysteriously “losing” documents.
You do not necessarily need to include a tax payment with your penalty abatement letter. However, if you can afford to pay, it’s a gesture that may help your case. If you don’t have enough money to pay, then you can apply for an installment agreement to make payments on your tax debt.
The requirements for penalty abatement are more open-ended and are usually much easier to attain than other types of tax debt settlements since the IRS will assign an actual person to your case instead of a computer.
Generally, the most important issue is whether the situation was out of your control. For best results, you should work with a tax relief professional who specializes in helping people with penalty abatement.