It's hard enough to pay back taxes. Having to also pay penalties (and interest on those penalties) makes it even more painful. Many taxpayers feel they are being unfairly or disproportionately penalized for having made an honest mistake or omission, or for having hired a tax preparer or accountant who misrepresented something on a filing without their knowledge. Others are frustrated by a process in which they feel the IRS is misinterpreting their financial situation or non-financial circumstances—for example, penalizing you for not making a quarterly tax payment when in fact you were in the hospital with a serious illness at the time it was due.

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In many cases it is possible to have a tax penalty "abated," which means "reduced" and/or "canceled" (depending on the situation). The IRS allows taxpayers to petition for abatement of a penalty (for example, for failure to file a return, to make a tax deposit, or to pay tax when due) on at least two different grounds.

One is by demonstrating "reasonable cause." This is based on all the facts and circumstances of your situation that can demonstrate you used "all ordinary business care and prudence" to meet your tax obligation but were still unable to do so. This wording is deliberately open-ended to allow for flexibility to consider each taxpayer's unique circumstances, but some classic examples of a "reasonable cause" include serious illness, a natural disaster, a death in the family, a fire, or an inability to obtain records. For example, if your house burned down in the middle of the night on March 15th, destroying all of your financial records, putting you in the hospital for a week with injuries, and forcing you to move in with relatives on the other side of the country, and you can document this with fire department records, photographs, receipts, and medical records and bills, then this would likely be sufficient grounds for the IRS to waive penalties for failing to file (or file for an extension) by April 15th. However, it is important to note that simply not having enough funds to pay your taxes on time is, by itself, not sufficient grounds for penalty abatement: you have to demonstrate that a "reasonable cause" was the reason why you lacked funds. Returning to the previous example, if you had also kept your life savings in cash under your bed (!) and it burned up in the house fire, that would likely be an acceptable reason for an abatement. But if you had lost $5,000 gambling at a casino the week before your tax payment was due, that likely wouldn't be an acceptable reason for the IRS to grant you a penalty abatement.

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Another ground for petitioning the IRS for a penalty abatement is under its First Time Penalty Abatement (FTPA) policy. The IRS understands that sometimes honest taxpayers make mistakes or encounter one-time circumstances that cause them to not pay their taxes on time (or deposit taxes), or even to not file a return at all. To qualify for relief under the FTPA program, you must have filed all currently required returns (or have filed an extension), have paid (or arranged to pay) any taxes due, and you have no penalties for the three tax years prior to the tax year in which you received a penalty. The abatement will be for one year only, and it covers only penalties for failure to file and/or failure to pay. The best part about this program is that the IRS doesn't require documentation about why you failed to file or pay. You don't need to prove anything, other than that you meet the terms and conditions of the FTPA program.

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If you're dealing with the IRS, you are probably aware that they charge interest on back taxes and penalties, and sometimes these interest payments can be very, very high. The good news, is that if the IRS abates a penalty, the interest charged on that penalty will be reduced/removed when the penalty itself is reduced/removed. It isn't possible to abate interest separately. The interest is based on the penalty.

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The individual state tax authorities usually have similar rules to the IRS for penalty abatement, but the precise details, programs, and conditions vary from state to state.

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Gold Path Tax can help you with all aspects of the penalty abatement process. If you have been assessed penalties for failure to file a tax return, to pay taxes on time, or to make certain required tax deposits, we can help you argue for relief based on a number of possible grounds. We can also help identify which state-level programs might be appropriate for you, and can prepare the paperwork to present your case. We care about you and your situation, and will work with you closely to make sure your complete financial and personal circumstances are factored into your petition for penalty abatement. Contact us for a free initial consultation with a tax attorney about your situation. Our Managing Attorney, Goldie Greenstein, can be reached by phone at 248-246-1154, or by e-mail at goldie@goldpathtax.com.

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