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Just how forgiving is the IRS?

Something I’m asked in almost every consultation with taxpayers that owe back taxes to the IRS is whether or not I’ll be able to get the IRS to agree to forgive the penalties and interest that have been accruing on the tax debt. It’s a fair question and a valid concern; interest and penalties often times can accrue rapidly, especially in instances where a taxpayer failed to file a return that had a significant balance owing for quite some time (this is the reason we almost always recommend a taxpayer file a return when due, even if they know they can’t afford to pay the balance that results immediately).

Unfortunately, I have to break it to the taxpayer that in most instances there isn’t a whole lot that can be done to abate penalties and interest.

Reasonable cause abatement

The IRS has a bit more leeway when it comes to the abatement of penalties than it does with interest, however. There are two main avenues by which one can have penalties abated. The first is for reasonable cause. In my experience, the IRS’s threshold for what constitutes reasonable cause is a very high bar to clear – it would generally require the hospitalization of a taxpayer or their immediate family member or some kind of disaster situation that prevented the taxpayer from being compliant in their obligations. In addition, once the circumstance that gives rise to a reasonable cause exception has subsided, the IRS expects taxpayers to immediately take action to come back into compliance. If the taxpayer delays at all in filing an outstanding return or paying a balance owed, the IRS has grounds to refuse to grant a reasonable cause abatement.

Qualifying for First Time Penalty Abatement

About 95% of taxpayers that are eligible for First Time Penalty Abatement do not request it, and you’d better believe that the IRS will not go out of its way to make it known that a taxpayer might be eligible for First Time Abatement.

Under First Time Penalty Abatement, the IRS will abate the penalties for failuretofile, failuretopay, and (in the case of businesses) failuretodeposit penalties associated with the taxpayer’s first year of noncompliance. Two conditions need to be met in order for a taxpayer to qualify for first time abatement:

The taxpayer was not required to file a return or has had no prior penalties for the preceding 3 years to the one in which they are requesting first time abatement, and
The taxpayer has filed, or filed a valid extension for, all currently required returns and paid, or has arranged to pay, any tax due.

Logic would suggest, therefore, that if a taxpayer has filed all required returns, there must be some year that is eligible for First Time Penalty Abatement, as there is always going to be a first year of noncompliance.

How much could you potentially save?

While you used to be able to request First Time Penalty Abatement online through the IRS’s eservices website, you may now only request First Time Abatement over the phone or in writing. It is not clear whether there is an upper ceiling on the amount that the IRS will abate through First Time Penalty Abatement, however experience has shown that they will abate penalties of under $10,000 over the phone. For amounts larger than that, they may require a request for abatement be made in writing.

Even if it has been a number of years since a taxpayer has been compliant with their filing and payment obligations, First Time Abatement may still be useful in reducing the balance owed to the IRS. While you have only three years to request a refund from the IRS, First Time Penalty abatement operates as a credit to your account and is therefore not bound by IRS limitations on refunds.

Even if a taxpayer’s first year of noncompliance was 10 or more years ago and the balance associated with that year has been completely paid off, the IRS can abate the penalties associated with that tax year and credit a more recent liability.



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