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Back Taxes and Tax Debt

Understanding the Different Types of IRS Penalty Relief

Jo Willetts, EA

Director, Tax Resources

Published on: June 16, 2020

We all know that the IRS assesses millions of dollars in penalties from taxpayers every year, but many people are not aware that the IRS also offers penalty relief for those eligible. It is important to understand what your obligations are to the IRS and the right penalty relief options there are for your particular situation. For example, you may have late payment penalty, which means you didn’t pay your taxes by the due date of the tax return, generally April 15, but May 17 for 2020 returns. There are many different types of penalties but here we will explore the types of penalty relief options offered by the IRS.

How do you know if you’ve received a penalty?

You will receive a notice from the IRS when you owe taxes that will include the applicable taxes, penalty type and amount, and the assessed interest. Once you get the notice, your first step should be to verify that the information in the notice is correct. If there is a problem with your notice and you don’t owe taxes, a penalty might not be due. You can contact the IRS to resolve issues with your notice at the toll-free number that appears on your notice. You can find more information about IRS notices and letters on the IRS website.

What is IRS penalty relief?

Your next step after verifying that you do, indeed, owe the IRS a penalty should be to identify whether or not you might qualify for penalty relief. So how do you know if you qualify for penalty relief? According to the IRS website, “You may qualify for relief from penalties if you made an effort to comply with the requirements of the law, but were unable to meet your tax obligations, due to circumstances beyond your control.” The IRS offers three main types of penalty relief: reasonable cause penalty relief, first-time penalty abatement, and administrative waivers, and statutory exemptions.

Reasonable cause penalty relief

Because the IRS knows that sometimes there are extenuating circumstances that cause a taxpayer to owe penalties, they will take into account any legitimate reason for failing to file a return or pay your taxes. If you can establish the facts of your case, reasons that would qualify you for this relief option include situations like serious illnesses, death, natural disasters, or other catastrophic occurrence, as well as:

  • “Acts of God” like fires, natural disasters, or other disturbances are considered reasonable causes.
  • Likewise, circumstances beyond your control, including death, serious illness, incapacitation, or the unavoidable absence of the taxpayer or your immediate family.
  • If you can’t get certain records, you may also qualify for penalty relief.
  • There are some other reasons that might enable you to get penalty relief. We recommend you visit the IRS site to learn more or consult an expert who can assess your individual situation.

To qualify for reasonable cause penalty relief, you will need to answer some important questions and provide certain documentation, depending on your circumstance.

Facts the IRS might require

You need to explain to the IRS exactly what happened to affect your ability to file a return or pay your taxes, including the exact events and timing, how the events caused you not to file or pay your taxes, and what actions you have taken to rectify the situation since the events.

You might need to provide medical records, court records, death certificates, or other documents that establish the reason for failure to file or pay. To learn more about how to establish reasonable cause and documents you might need, visit the IRS page on reasonable cause penalty relief.

First-time penalty abatement and other administrative waivers

Is it the first time you have failed to file or missed a payment? If so, you might be able to request penalty relief. According to the IRS website, you can request the first-time penalty abatement if the following are true:

  • You didn’t previously have to file a return, or you have no penalties for the three tax years prior to the tax year in which you received a penalty.
  • You filed all currently required returns or filed an extension of time to file.
  • You have paid, or arranged to pay, any tax due.

You can find the criteria on the IRS site.

Statutory exceptions

Sometimes the IRS makes mistakes and you could get a statutory exception, especially if you received advice from the IRS that led to your penalties. As with the other penalty relief options offered by the IRS, you may need to provide careful documentation showing that the IRS gave you erroneous advice. According to the IRS, “…generally, Form 843, Claim for Refund and Request for Abatement should be filed to request penalty relief based on incorrect written advice from IRS.” To learn more, visit the IRS site on penalty relief due to statuary exceptions.

In conclusion, mistakes happen, life happens, and the IRS recognizes this by providing these penalty relief options.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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