In our last post, we noted that interest and penalties generally accrue until a tax debt is paid off, even if the taxpayer has negotiated an installment or other type of repayment plan with the IRS. This begs the question of whether all tax disputes or miscalculations trigger tax penalties.
According to the IRS, relief from penalties may be available if a taxpayer’s failure to meet tax obligations was caused by circumstances beyond his or her control, rather than a lack of effort. Notably, that principle may apply even for large failures, such as not filing a tax return or not paying taxes that were due. However, interest on the underlying tax debt accrues even if a penalty has been abated.
The IRS offers several categories of penalty relief: reasonable cause, administrative waiver and first time penalty abatement, and statutory exceptions. The first category is perhaps the most ambiguous, due in part to the case-by-case manner by which it is granted.
Some examples of reasonable cause might be the death of a loved one, a serious illness, or fire, casualty or natural disaster. However, the IRS’ policy is to consider any reason that demonstrates why a taxpayer could not meet his or her federal tax obligations, in spite of using all the ordinary care and prudence that is expected of taxpayers. The IRS may also require documentation of the reason, such as an individual’s medical records.
The administrative waiver or first-time penalty abatement is a more straightforward category. Administrative waivers are generally available if a taxpayer received incorrect advice from the IRS. The first-time penalty may be available if a taxpayer has arranged to pay all of the tax due and did not have any penalties for the three tax years prior to the tax year in question.
Finally, there are several statutory exceptions to penalties in the Internal Revenue Code. Our tax law firm can help taxpayers utilize these and all other arguments in their favor.
Source: “Penalty Relief,” copyright 2016, Internal Revenue Service