Learning More About IRS Penalty Relief

Learning More About IRS Penalty Relief


The economic crisis in 2008 had devastating effects on the American taxpayer. With a record number of unemployed Americans, many families struggled with financial hardships, which in turn led to huge amounts in back taxes owed to the IRS. To address the situation, the IRS re-tooled some its existing collection programs and launched them under the “Fresh Start Initiative.”

These programs were meant to offer alternative options for resolving tax debts by making it more manageable for taxpayers to pay off back taxes. The original program was aimed at helping taxpayers by easing policies related to tax liens, installment agreements, and Offers in Compromise. Since then, the IRS has worked to expand the Fresh Start Initiative by further facilitating taxpayer eligibility to the existing programs and adding IRS tax penalty relief provisions for qualifying individuals.

Fresh Start Penalty Relief Initiative

Failure-to-pay penalties are one of the biggest issues for financially distressed taxpayers. The taxpayers are essentially being punished for not having enough money, by forcing them to pay more money. The IRS penalty relief is meant to help these taxpayers who are most in need by giving them a six-month grace period on failure-to-pay penalties. What this means is that individuals would have until October 15th to pay their taxes (instead of the April 15th deadline) without incurring a penalty. It is important to note that the interest on the amount owed will not be waived during this time period.
Qualifying taxpayers can petition to have their failure-to-pay penalties waived for six months if they meet these requirements:

  • Taxpayers must show that they were unemployed for at least 30 consecutive days during the tax year.
  • If self-employed, taxpayers must show that their income decreased by at least 25%.
  • Income earned by individual cannot be over $100,000 per year; for a married couple filing jointly, the income earned cannot exceed $200,000 per year.

If taxpayers qualify for this extension, then they must pay in full any taxes, interest, and penalties owed by the October 15th deadline, otherwise the Failure-to-Pay penalty will be charged. It is also important to note that this type of relief does not apply to Failure-to-File penalties, so taxpayers must file their returns on time.

Other IRS Penalty Relief Options

First-Time Penalty Abatement (FTA):
First-Time Penalty Abatement is an IRS Penalty Relief program that is meant to provide an opportunity for typically compliant taxpayers to request the removal of certain tax penalties. This type of penalty waiver is a one-time consideration and is based on the taxpayer’s compliance history.

The requirements to qualify for a First-Time Penalty Abatement are:

  • Taxpayer has filed all required returns, or filed an extension to file.
  • Taxpayer has paid, or arranged to pay, any tax due.
  • Taxpayer did not previously have to file a return, or taxpayer has not received any penalties for the three tax years prior to the tax year in which the taxpayer received a penalty.

The penalties eligible for to be removed under First-Time Penalty Abatement are:

  • Failure-to-Pay penalties
  • Failure-to-File penalties
  • Failure to deposit certain taxes as required
  • Other penalties as applicable

So, let’s say Steve wants to see if he qualifies for a First-Time Penalty Abatement. Steve pulls up his transcripts from the IRS, and his compliance history is as follows:

  • 2012: Filed and paid taxes on time
  • 2013: Filed and paid taxes on time
  • 2014: Filed and paid taxes on time
  • 2015: Owes $15,000 in taxes, including $6,500 Failure-to-File & Failure-to-Pay Penalties
  • 2016: Owes $10,000 in taxes, including $4,000 Failure-to-File & Failure-to-Pay Penalties

Looking at Steve’s compliance history, he has filed and paid his taxes properly from 2012 through 2014, and then he stopped filing his taxes. Since he was compliant for three years prior to receiving his Failure-to-File and Failure-to-Pay penalties in 2015, Steve qualifies for the First-Time Penalty Abatement to waive his 2015 tax penalties ($6,500). Interest accrued will still have to be paid.
The IRS will not grant Penalty Relief for the 2016 tax year under the First-Time Penalty Abatement Program. Steve must show reasonable cause to qualify for a penalty relief in 2016.

Reasonable Cause Penalty Relief

To establish reasonable cause, a taxpayer has to show that:

  • Taxpayer demonstrated “ordinary business care and prudence”, but was unable to meet tax obligations due to circumstances beyond his/her control.
  • Taxpayer was diligent in taking actions to rectify the situation once circumstances changed.
  • Some reasons that would typically pass as reasonable cause include: death, serious illness, fire, natural disaster, inability to obtain records due to theft, incorrect advice from a tax professional, bad advice from the IRS, etc.

The reasons are unlimited, as long as the taxpayers prove that, due to circumstances beyond their control, they were unable to meet their tax obligations despite exercising ordinary business care and prudence.

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