To many people, the IRS is a big, scary institution that makes demands, takes your money, and penalizes you for the smallest mistake.
If that’s your view too, then you might be surprised to learn that the IRS is capable of showing mercy. In today’s article, I’ll take you through how to beat IRS penalties, and I’ll even provide you with a downloadable first-time penalty abatement letter.
Types of Penalties
As you probably know, the IRS wants to be paid on time. In fact, “deadline” is one of their most-used words (and mine too!). There are two common types of penalties: late filing penalties and late payment penalties.
Late Filing Penalties
- For individuals and C corporations, the penalty for filing late is typically 5% of the total tax owed for each month the return is unfiled for a maximum penalty of 25% of the tax owed.
- For S corporations and partnerships, the penalty for filing late is $200 per partner or shareholder per month with a maximum of $2400 (12 months). This increases to $210 per month in tax year 2020.
Late Payment Penalties
- The penalty for paying late is .5% of the tax owed for each month the tax is unpaid with a maximum of 25% of the tax owed.
How to Beat IRS Penalties
If you have received a bill from the IRS for one or both of these penalties, don’t panic. There are several ways that you can beat these IRS penalties:
First-Time Abatement
If this is the first time you’ve received a failure-to-file or failure-to-pay penalty, just ask for mercy. Download our first-time abatement sample letter to see exactly what you need to say. If you’ve not applied for first-time abatement before, then the IRS will remove your penalty. Remember, though, you can only use this strategy once.
Reasonable Cause
If this isn’t your first time asking for abatement, you can still ask for forgiveness by giving the IRS a legitimate reason and clear explanation as to why you failed to file or pay on time. To increase your chances of qualifying for a “reasonable cause” abatement, it’s important that you use specific keywords or buzz words in your conversations and/or letters to the IRS.
You should also provide documentation whenever possible. Here are the big three areas that are often considered and approved:
- Death or Serious Injury: You’ll need to have all of the details ready when explaining this cause. For instance, you should know your relationship to the deceased or injured and be prepared to answer how the death impacted you or your business.
- Fire, Casualty, or Natural Disaster: As with any reasonable cause case you make to the IRS, you’ll need to provide details about how the disaster has affected your personal life or business. It’s important to show that you have tried “in good faith” to comply with tax laws but that you haven’t been able to do so because of a specific disaster beyond your control. Since the entire United States received an official disaster declaration for the COVID-19 pandemic beginning in January 2020, it is possible that this disaster will offer reasonable cause to help you avoid tax penalties if you or your business were directly affected and if you can explain how and when.
- Missing Records: If you couldn’t obtain important records and that caused a delay in filing your taxes, make sure to explain why those records were important, why they were unavailable, and what you had to do to obtain those records. You’ll also need to explain how you promptly tried to file as soon as you were able to obtain your missing records.
Partnership Relief
If you have a partnership (not an S corporation) that filed on time and meets all of the following requirements, then you can call the IRS and tell them you want relief under Revenue Procedure 84-35:
- There are 10 or fewer partners (husband and wife filing a joint return count as one partner)
Each partner is an individual or estate (cannot be a non-resident alien) - Each partner’s proportionate share of any partnership item is the same as his/her proportionate share of any other partnership item
- The partnership did not elect to be subject to the rules for consolidated audit proceedings
- All partners reported their shares of partnership items on their income tax
What Not to Say
It’s important that you present yourself to the IRS in a way that highlights your confidence and honesty as a businessperson and citizen. Do not say things like “I forgot” or “I didn’t know the law.”
Not only will those types of statements not help your case (not understanding the law is not a defense for breaking the law), they will not help in proving that you have been putting forth a good faith effort to follow all tax laws. You also can’t blame your accountant for failure to file or pay.
Be Persistent
If you’ve requested abatement and weren’t approved, the IRS will send you a letter denying your request in writing. Even if you are denied, don’t give up. In the letter, the IRS will give you steps for appealing their decision. Read those carefully and follow through with any that make sense to your circumstances.
Get Your Money Back
Even if you’ve already paid your penalties, it’s not too late to get that money back! Fill out and file Form 843 to request that your money be returned. You typically have three years from the date you filed the return and two years from the date you paid the penalty to ask for your refund.
Action Steps
- If you have received a penalty bill from the IRS, don’t just automatically pay it. Look through the strategies in this article and figure out your best chance for receiving abatement.
- Gather together details and documents to have in-hand while speaking to the IRS about abatement and your particular circumstances. Practice what you will say and how you will say it. Remember they want to know the facts and circumstances surrounding your failure to file or pay as well as what steps you took to pay once those circumstances changed.
- Don’t give up. You’ve worked hard for your money; don’t be afraid to work hard to keep it.
