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Tax Penalty Abatement: How, What & Why Penalties Can Be Abated

Individuals who owe the IRS back taxes may be able to reduce the amount of money owed by seeking a tax penalty abatement.  This action, if successful could make it possible for the taxpayer to eliminate penalties that have been applied to their tax liability.  This can greatly reduce the amount owed, leaving only the original balance and any interest applied to that amount.  It is important to note that in most cases, interest applied to back taxes will not be canceled unless very specific circumstances are met. 

How Does It Work?

The IRS handles each case on an individual basis.  For this reason there is really no set formula that can be anticipated for penalty abatements.  If you owe back taxes and can prove to the IRS that you had a reasonable cause for not filing or paying taxes owed, you may be eligible for a penalty abatement.  As previously stated, those who qualify would be responsible for paying the original balance and in most cases interest applied to that balance.  Penalties applied to the outstanding balance would be canceled. 

Who Qualifies for a Penalty Abatement?

Any person who is able to prove to the IRS that they were unable to file or pay taxes for reasons outside of their control, may be eligible for a penalty abatement.  The taxpayer must also prove that there was no way possible to counter the reasonable cause given for not being able to pay tax liabilities.

What is Considered a Reasonable Cause?

The IRS considers a reasonable cause any action or situation which is beyond the control of the taxpayer which renders them unable to reasonably pay their tax liability.  The following examples describe situations or causes that may be accepted by the IRS when considering a tax penalty abatement.

  • Absence of taxpayer that is unavoidable. Incarceration or rehabilitation are examples of unavoidable absences.
  • The death of someone close to the taxpayer. This may include a parent, spouse, child or other person very close to the family.
  • Loss, theft or destruction of financial records.
  • Divorce which may result in the inability to access assets.
  • Incorrect or bad advice provided by a tax professional or IRS representative.  The taxpayer must be able to prove that the source was a trusted and competent individual as well as proof that the information provided was correct. 
  • Any other reason or cause that proves the taxpayer took all available actions to pay or file taxes yet remained unable to do so. 

The IRS will consider other factors in addition to reasonable cause.  It is imperative you provide documented proof that you acted in a responsible manner and took every action available to avoid the situation which resulted in your inability to pay your tax liability. 

Why Penalties Can be Abated?

Penalties are applied to back taxes in an effort to "encourage" taxpayers who are delinquent to pay their tax liability and resolve their tax issues.  The IRS does realize that there are circumstances where taxpayers may not be able to stay in compliance with IRS regulations and it is not their intent to punish these people.  Remember that penalty abatement is a good faith gesture based on the taxpayers ability to show past responsible handling of finances as well as a reasonable cause preventing the taxpayer from filing or paying taxes as required. 

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