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When you owe back taxes to the IRS, penalties are assessed for payments that are overdue. Naturally, the IRS is very hesitant to reduce or waive these penalties because they want taxpayers to learn a lesson for failing to pay on time. That said; there are several “reasonable causes” in which they may consider penalty abatement.
Here are some of the scenarios in which you may be able to convince the IRS to waive a penalty:
Ordinary Care and Prudence: This is the argument that you did all you could, but because of circumstances beyond your control, you were unable to pay your taxes on time. In general, the IRS will look at your compliance history to determine if your explanation is credible. Typically, if your explanation seems reasonable and you have always filed and paid your taxes on time in the past, there is a good chance your penalties can be waived.
Death, Serious Illness, or Unavoidable Absence: If you can verify that you had a serious illness, death in the family, or other type of personal tragedy, this often a successful defense for individuals. Businesses have a harder time with this defense unless there is clearly one designated person in charge of all the business tax filings.
Ignorance of the Law: This defense is not often successful unless you are a first time offender and there is good reason to believe you were unaware of the tax law. However, this may sometimes be used successfully as a secondary argument in conjunction with one of the other reasonable causes.
Forgetfulness and Mistakes: Almost all of the time, this is an unsuccessful argument for penalty abatement.
Inability to Obtain Necessary Records: This is generally a difficult argument to be successful with because taxpayers are supposed to do their diligence and gather all the pertinent records necessary to file their taxes before the deadline. However, if you can show that some of your records were held up by a third party, this may qualify as a circumstance beyond your control.
Undue Hardship: If paying the penalty will cause “more than an inconvenience to the taxpayer”, such as taking money needed for rent, food, clothing, and other necessities, you may be successful with this argument.
Poor Advice from Tax Preparers or the IRS: If you can demonstrate that the advice of a tax preparer or especially the advice of someone from the IRS led to the penalty being assessed, this is often a strong argument for penalty abatement.
Casualty or Natural Disaster: Casualties, fire, flood, and other disasters are usually the strongest reasonable cause for penalty abatement. Particularly if your region is a state or federally declared disaster area, the IRS will almost always waive the penalty for late tax filings.
Successfully arguing for penalty abatement takes some diligence and it is important to be well-prepared any time you present your case to the IRS. To help with preparation and to determine the best argument to use in your particular circumstance, it is always best to speak with a local tax professional.