When you fail to pay the IRS back taxes you will be fined penalties and charged compound interest (as much as 47% per annum). Often the amount of penalties and interest charged is significantly higher than the taxes owed. Reducing or getting exemption from tax fines is commonly known as tax abatement. It is possible to negotiate for an abatement of penalties and interest, but it is at the discretion of the IRS agent you are working with. The IRS allows you to avoid IRS tax penalties if you have a good reason, known as reasonable cause.
Decisions are made by the IRS on an individual, case-by-case basis. Reasonable cause can be anything like divorce, death of a loved one, a medical emergency, loss of job, failed business, being cheated etc. In fact, IRS guidelines generously suggest that a penalty abatement should be “generally granted when the taxpayer exercises ordinary business care and prudence” in trying to pay their taxes.
So tax abatement can be granted by the IRS based on a number of reasons. Experts say that the IRS may choose to abate your penalties if your tax debt resulted from one of the following:
- Death or serious illness of someone in your immediate family
- Unavoidable absence
- Unforeseen disaster (like a fire) to your business
- Inability to determine the tax because of reasons beyond your control
- Civil disturbances
- Lack of funds, despite your exercise of adequate business prudence
- Other reasons that show you exercised ordinary business care but could not pay your full taxes by the deadline
In order to obtain a tax penalty abatement, you need to make a IRS Penalty Abatement petition to tell the IRS what happened to you that prevented you from fulfilling your tax obligations.
If your reasonable cause is not deemed good enough, generally you won’t be given an abatement unless the IRS made an error or somehow delayed your tax case, causing the interest to pile up. But it is very difficult to get the IRS to admit to an error. However, if you believe this is the case, then make sure you have some documentation or a detailed contact log to prove your case.
If you submit an IRS Penalty Abatement petition and it is denied, you cannot make a request on the same grounds again.