Owing money to the IRS is one thing. The IRS can supersede all private creditors and utilizes multiple collection actions to coerce payment. Yet, despite a relatively diverse arsenal of options for dealing with tax debt, IRS first time penalty abatement is a great option. The IRS’ most persuasive tool is simple: penalties and interest. The IRS penalizes taxpayers who are behind on their taxes or are facing another infraction, turning even relatively minor debts into serious financial obligations. The longer you wait to deal with your IRS problems, the more severe they become – until they spin out of control.
However, most taxpayers don’t plan on getting on the IRS’s wrong side. Unfortunate circumstances, human error, or first-time transgressions may buy you some sympathy from the government. If you go through the proper channels, you can even aim for penalty abatement, writing off most or all of your accumulated interest and penalties and allowing you to focus entirely on your principal debt. Penalty relief is available through a variety of means. Often, a taxpayer’s best bet is through first time penalty abatement.
What Is IRS First Time Penalty Abatement?
First time penalty abatement is, as the name implies, a form of penalty relief exclusive to taxpayers finding themselves in trouble with the IRS for the first time. However, despite the name, this form of penalty abatement is not complete for taxpayers who have never had to deal with the IRS before. In fact, despite the IRS’ reputation, the qualifications for first time penalty abatement are not as strict as you might expect. The IRS may accept a petition for first-time penalty abatement if:
- You have not previously filed a return with the IRS yet, or you have not had any other form of penalties from the IRS in the last three tax years before this penalty.
- You have either filed all necessary and due tax returns or filed for valid extensions on your filing time.
- You have paid all your due taxes or are in the middle of paying off your due taxes (bonus points if it’s through automated withdrawals, aka Direct Debit).
Penalty abatement also works for taxpayers who intend to seek a refund for their penalties after they have completely paid off their accumulative debt to the IRS. Most tax specialists advise clients to resolve their debt first to avoid the awkward situation of successfully petitioning for penalty relief, getting it, and then accruing additional penalties because your debt hasn’t paid off. You can do so via Form 843, Claim for Refund, and Request for Abatement.
To recap, this means first time penalty abatements are available to you if you haven’t found yourself in hot water with the IRS for the last three years and fulfill the other requirements of catching up with your outstanding balance and missing returns (if applicable).
Understanding IRS Penalties and Interest
IRS penalties range from cut-and-dry to complex. There are both percentage and flat penalties, and most penalties stack, turning even a negligible debt into a sizeable problem given enough time and cold shoulder tactics on your part. In total, the IRS’ penalties number well over a hundred. But only a few factors as truly important, and only a handful are eligible for penalty relief. The most significant penalties to remember include:
- Failure to file penalties
- Failure to pay penalties
- Accuracy-related penalties
- Information return penalties
- Failure to deposit penalties
- Dishonored check penalties
- Underpayment of estimated tax penalties
IRS interest rates are a bit more complicated and may be more challenging to seek relief. While the IRS may forgive some of your interest, you shouldn’t count on it. The most reliable way to minimize the growing interest you owe the IRS on your tax debt is to sign up for a payment plan as soon as possible. The IRS may reduce the interest you owe if you plan to pay them regularly, usually through an installment agreement plan.
Calculating the IRS Interest Rate
The IRS interest rate changes quarterly on underpayment and overpayment (meaning, what they owe you). It is generally the federal short-term interest rate (as per the IRS Newswire) plus three percentage points for individuals. Your interest rate may drop if you enter a payment plan with the IRS.
Other Types of Penalty Abatement
In addition to first time penalty abatement, you may also seek penalty relief on the following grounds:
Reasonable Cause
The IRS may relieve you of any applicable penalties if you have likely cause for having them in the first place. Several examples include a death in the family, a state of emergency, or living in an active combat zone.
An IRS Error
If the IRS failed to communicate your debt to you promptly or offered terrible advice, you may be able to argue that you were not as informed as you should have been. In this case, the IRS is at fault, and you should not have to pay for it. IRS errors aren’t easy to prove and rarely happen.
Innocent Spousal Relief
If your penalty is the result of something your spouse did because they manage taxes for the both of you, you may be able to argue for innocent spousal relief with the help of a tax professional.
Seeking IRS First Time Penalty Abatement
The first step to getting help with your tax debt should involve contacting a tax professional. Tax professionals can help you qualify for penalty abatement, navigate payment options for debt resolution, and advise you on potential opportunities to minimize fees and debt payments (given specific financial prerequisites). Dept payment plans include partial payment plans, an offer in compromise, and low-income taxpayer relief.
If you are eligible for some penalty relief, your next step is to contact the IRS. You can ask for penalty relief by writing to the IRS (via mail) or calling customer service to get human help. Asking for penalty release may lead to the IRS reviewing your case and either granting or denying penalty abatement.
You have the right to appeal any decision the IRS makes, including a decision to deny penalty abatement. Be sure to discuss the option of an appeal with a tax attorney to understand your chances of winning a request. Consulting with an attorney will help you gather all the evidence you need to prove that you are eligible for penalty relief.