If you owe tax debt and fail to pay it in time, the IRS can penalize you. Every year, millions of penalties are assessed. The IRS uses penalties for encouraging taxpayers to comply with the rules. Owing money to the IRS is overwhelming and intimidating. This penalty can further increase your tax debt. However, before the IRS starts taking collection actions, you can request for Penalty Abatement.
When you owe money to the IRS, you can’t just put it off forever. You need to resolve all issues before the IRS starts taking extreme measures to collect the debt. These extreme measures might include garnishing your wages, seizing your assets, levying bank accounts, and others. But, would Penalty Abatement get you some relief from tax debt? Yes, because penalties and interest make up a large portion of your debt.
So, if you have a reasonable cause, you can request the IRS for penalty abatement. Here are some of the reasons acceptable by the IRS for penalty abatement:
Reasons acceptable by the IRS for penalty abatement:
- A medical emergency
- Death in the family
- An error made by an employee of the IRS
- Records destroyed because of a natural disaster or a catastrophe. E.g. Flood, etc.
- Mailed returns and payment timely but to the wrong address
Criteria to qualify for penalty abatement
- You must not have had any penalty of more than $100 for the last three years.
- All your returns and extensions are filed properly. If you still have paperwork to do, you won’t be eligible. So, before you write your penalty abatement letter, make sure that you have already updated all the filing with the IRS.
- You must have made arrangements for any tax debt that you owe. Even if you are not able to pay the debt in full, you must have at least set up a payment plan with the IRS.
For the first time penalty abatement, you can apply in writing, online, or by calling the IRS. If you are eligible, the IRS will remove the penalties. However, if the IRS refuses, the penalties will continue to grow. Also, the IRS removes penalties that were incurred in the first year. On several penalties, there is a limit on how much can be removed.
Writing a Penalty Abatement Letter
If the IRS has imposed a penalty on your back taxes, you can write a letter to the IRS requesting Penalty Abatement. However, if you want to improve the chances of getting your request accepted, you must take the help of tax professionals.
For requesting specific penalty abatement that is for more than a year, you have to prove to the IRS that you had a reasonable cause like:
- The death of a family member
- Held hostage in some other country
- Unavoidable absence like being in jail or rehab
- Tax records were destroyed because of floods, fires, or other casualties
- Could not make the payment because of a civil disturbance like a riot or mail strike
- Couldn’t determine the right amount of tax for reasons that were not in your control
- Received wrong advice from a tax expert whom you thought to be trustworthy and competent.
With the letter, you have to send the copies of documents supporting your reason.
Three things to do before drafting your Abatement Letter
- Get all the historical tax records from the IRS as well as your personal papers. It will help you get the same view as the IRS agent.
- Next, you need to start reviewing the records so that you have an understanding of what happened that stopped you from paying your tax debt on time. This way, you will be able to start working on the penalty abatement letter.
- Once you have an understanding of what occurred and what the IRS knows about you, you need to start conducting research. This is just to ensure you have enough grounds for warranting penalty relief.
Organizing a Penalty Abatement Letter
While writing your penalty abatement letter, you have to design it in a way that the IRS agent is able to easily follow what happened, why you were penalized, and what steps you took for rectifying or mitigating the problems. Every fact that you present might need different styles of organization. Here, is a general section format of a penalty abatement letter:
- Introduction - The letter should start with a brief statement where you introduce yourself and tell what exactly you are asking for. In this case, you are asking for relief from penalties and any interest accruing because of those penalties.
- Facts - This section is the most important part of your penalty abatement letter. You should present the facts in a way that the reader, the IRS agent who will be making the decision, feels sympathetic to your plight.
- Issues - If your fact section is becoming too complicated, you can add a separate section for clarifying the exact issue.
- Law and Analysis - This section is a follow-up to the facts sections. In this, you will be mentioning the laws that are in conjunction with the facts. They must support your proposition of warranting penalty relief.
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- Conclusion - In the end, reiterate what you are looking for. Request the IRS to give you relief from penalties and the interest accrued from those penalties.
It is not necessary to include the payment along with the penalty abatement letter. But, if you can pay the debt, it will help your case a lot. If you cannot afford to pay, you can apply for an IRS payment plan that allows you to make monthly payments to pay off your tax debt.
Penalty abatement has more open-ended requirements. It is also easier to get than any other form of debt settlement. This is because, instead of a computer, an actual person will be attending your case. The only important issue here is whether your situation was beyond your control or not. If you want to improve your chances of getting the penalty abatement, take help from tax relief experts who specialize in penalty abatement.