As a U.S. taxpayer, one of the last things that you want to hear is that the Internal Revenue Service (IRS) has disagreed with your tax assessment and has imposed penalties for noncompliance. The good news is that the IRS abates most of the penalties that it initially imposes: In 2022, the IRS assessed $73.6 billion in civil penalties, but proceeded to abate almost $50.9 billion of them – nearly 70 percent of the original amount.
With this in mind, Dr. Nick Oberheiden, founding partner of the national law firm Oberheiden P.C. and a leading tax attorney at the firm, summarizes five IRS penalty abatement strategies that may be available to you, depending on your particular circumstances.
1. The First-Time Abatement
One of the most common tax abatement strategies that you can use if have not been penalized by the IRS in the past is the first-time abatement. According to the IRS, you are only eligible for this abatement if both of the following are true:
1. You filed income tax returns for at least 3 years before the due date and got penalized by the IRS, and
2. You are in good compliance with the agency, which means you have no unpaid tax bill or have not been penalized in those 3 years or, if you were, the penalty for the tax owed was removed for a reason other than a first-time abatement.
This abatement strategy, however, is typically only available for penalties related to the following violations:
- Failure-to-file
- Failure-to-deposit
- Failure-to-pay
One of the best ways to request a first-time abatement for an IRS penalty assessment is by filing Form 843. You can also request penalty relief by calling the IRS or by making a formal, written request.
2. Correct a Mistake by the IRS
Many of the penalties that the IRS imposes on taxpayers are based on information that gets automatically assessed by computer programs. While this drastically expedites the process internally for the IRS, it also means that some tax return penalties – sometimes, quite substantial ones – are imposed without any human oversight whatsoever. If the estimated tax payments are incorrect or there is missing information, then you owe taxes and could get automatically penalized by the IRS when you do not deserve it.
This is why it is so important to fully investigate, on your tax records, exactly what the IRS is penalizing you for. There is a significant chance that the allegation of noncompliance with the tax code is groundless. If you can provide documentation proving this, the IRS should abate the penalty and remove the blemish on your taxpaying record.
3. Exceptions Apply
The tax code is notoriously complex. It is so complicated that IRS agents frequently assess penalties that are not applicable in your case because you fall within a statutory or regulatory exception to the rule, but the agent does not realize it.
Unfortunately, these are probably the most difficult tax penalties to get abated, as the burden falls on you to point out that an exception to the tax penalty applies in your case. This can be extraordinarily difficult for non-tax professionals to do: As just stated, the tax code is notoriously complex.
As Dr. Nick Oberheiden, a tax lawyer at the national law firm Oberheiden P.C., points out, “There is a saying in the law that ‘for every rule, there is an exception.’ This is particularly true for tax law. The bad news for taxpayers is that there is little chance that they are going to know these exceptions, or that they will understand them even after considerable research. Worse, IRS agents make mistakes and assess penalties even though an exception should apply. Getting these penalties abated and removed often takes the help of a seasoned tax lawyer or professional.”
4. Administrative Waivers
The IRS has the discretion and the power to issue administrative waivers of tax penalties if you request one and you have a good argument for why the penalty should be abated. In the past, these waivers have been granted if the IRS penalty was somehow related to or exacerbated by:
- Undue hardship
- Natural disaster
- Fire
- Incorrect tax advice from the IRS
These and other waivers for particular situations are created and addressed in IRS regulations and press releases. They are designed to give the IRS flexibility in waiving future penalties and other tax obligations when people would unfairly struggle to meet them.
Technically, the first-time abatement is a type of administrative waiver. Another administrative waiver that you may have heard of was the one that waived numerous tax requirements during the coronavirus pandemic in 2019 and 2020.
5. The Reasonable Cause Abatement
The IRS can also abate a tax penalty if you can show that your noncompliance with the tax code was the result of reasonable cause.
You can show that there was reasonable cause for your tax violation if you can prove that:
1. You used ordinary business care in determining your tax obligations, but
2. You were unable to comply with those obligations.
The IRS will consider the totality of the circumstances when determining whether your violation was the result of reasonable cause. A couple of examples of reasonable causes have been:
- Recent changes in tax law that you could not reasonably be expected to have noticed
- You relied on the advice of a competent tax professional after providing them with all of the necessary information
As you can see, reasonable cause abatements are similar to administrative waivers. Administrative waivers, though, are for slightly more well-defined sets of circumstances. Reasonable cause abatements are more vague and flexible, and so generally require more information and context to be successful in abating a tax penalty.
Conclusion
It can be intimidating to get an IRS notice, open it, and discover that the agency is penalizing you or your company for noncompliance with the tax code. It can be devastating if the amount of the penalty for the tax year is high.
The important thing to remember is that you can challenge the imposition of the penalty and that you have legal recourse if your challenge is denied. Abating a tax late payment penalty is not just a possibility, it is fairly common.
