Penalty and Interest Abatement
Typically interest will not be waived. On the other hand penalties may be waived if (1) you can show cause or (2) you are a 1st-time offender. When determining whether to request abatement of penalties, the Tax Resolution Institute weighs the prize versus the price. Aside from the cost of requesting a penalty abatement, we consider how much of a burden will be placed on the client (sometimes doing so requires substantial documentation) as well as the time lost in doing so.
In some cases requesting to waive penalties is a “no brainer” and we will jump at the chance to do so. In other cases the cost of requesting the abatement may outweigh the benefit. For example, if a client owes $100,000 that they cannot afford to pay and we can request that the IRS remove $2,000 in penalties, it may cost the client money they can better spend elsewhere and waste valuable time knowing that success will only lower the client’s liability to $98,000…an amount they can no more afford to pay.
Needless to say, if your case warrants a request for abatement of penalties, you have come to the right place. We have over 30 years experience helping clients with issues such as yours.
Assessing the Situation
When clients make initial contact with a tax resolution provider regarding their tax concerns, one of the first questions they ask is “can you remove the penalties and interest that has been assessed toward my delinquent taxes?” To be perfectly clear, you will most likely not be successful in removing interest. Interest generated from delinquent taxes will not be abated with the exception of a few extraordinary circumstances. In order to abate interest the taxpayer must prove that he or she was caused an unwarranted delay that was directly caused by the actions of an IRS employee; and, the delay itself caused the interest to be charged. The IRS and State taxing agencies have a steadfast policy that interest will be charged on delinquent taxes. There are other ways to indirectly keep from paying interest including submitting an Offer in Compromise or entering into a Partial Pay Installment Agreement. In these cases the necessity to pay interest has not been eliminated as a line item but in effect the interest or a portion thereof need not be paid. That being said, if you are able to abate penalties and/or have tax liabilities reduced, you can in turn reduce the interest that has accrued on said penalties and tax.
Having penalties waived (removed) on the other hand is a different story. There are several steps you can take to have penalties waived. Assuming you have the ability to have penalties waived, the question remains as to whether or not it makes economic sense to complete the work necessary to remove said penalties. For example, if a taxpayer owes $500,000 in back taxes, and the possibility exists to have a $10,000 penalty waived, should said taxpayer pay a professional to have the penalty removed? If the taxpayer has the ability to full-pay their liability within the statute of limitations, the answer would most likely be “yes”. However, if the taxpayer is earning minimum wage and has no assets to speak of, he or she would be spending their limited funds more wisely to address the $500,000 liability as opposed to reducing it to a $490,000 liability and still having to address the same concerns.
There are certain things you must know if you wish to have penalties abated. First and foremost, the IRS will typically not abate a penalty unless it has already been paid. Beyond the necessary to prepay a penalty and related interest on a liability, it can be advantageous for a taxpayer to do so because it will stop the additional interest that continues to accrue if the penalty is ultimately not removed.
As a rule of thumb, you may request an abatement of penalty if you show cause. A taxpayer who voluntarily steps forward and corrects a deficiency in a previously filed return is often successful in requesting penalty abatement. A taxpayer will most likely not be successful in requesting an abatement of a penalty that was assessed as a result of an audit.
The most common way to request that a penalty be abated is write a letter to the IRS office that issued the initial notice. The chances of having the abatement granted increase if the letter is in response to the first notice received and not sent once collection activity has commenced.
Correspondence to the IRS requesting the abatement should be clear and concise, including both a detail of the cause of the penalty assessment, as well as providing supporting documentation showing why the penalty should be removed.