How Can You Avoid IRS Penalties When You Owe Taxes?

Did you file your tax return late or not at all? Are you behind in paying your taxes? Failing to file a tax return or pay on time can result in penalties as well as interest on the amount you owe. Fortunately, you may be able to reduce or avoid IRS penalties. This is known as penalty abatement and you must apply for and meet the requirements to obtain it.

When Will the IRS Impose Penalties?

You may know that penalties apply when you fail to timely file your tax return or pay your taxes. However, there are also penalties for having substantial inaccuracies in tax filings, failing to deposit certain taxes as required or otherwise not complying with tax laws.

The IRS imposes penalties to encourage compliance and expedite the taxpayer’s resolution of their outstanding liability. If you know you will be hit with penalties, you are more likely to take proactive steps to avoid increasing your tax liability.

What Is a Penalty Abatement?

A penalty abatement is the forgiveness of penalties and penalty interest a taxpayer has accumulated on their tax returns. If you are approved for a penalty abatement, you are still obligated to pay your underlying tax liability and any accrued interest but will be absolved of abated penalties.

Who Qualifies for Relief?

The IRS recognizes three main classifications for penalty abatement:

• Reasonable Cause. You must have a sound reason for failing to meet your tax obligation, such as natural disaster, inability to obtain records, death, serious illness, or other reason that would establish that you used all ordinary business care and prudence to meet your tax obligation but were unable to do so.
• Administrative Waiver and First Time Penalty Abatement. Generally, this applies if you did not have a previous obligation to file or you have not been subject to a penalty for the three preceding tax years.
• Statutory Exception. This typically applies if you received incorrect written advice from the IRS.

Note that New York State also offers penalty abatement under similar circumstances. However, the State does not provide first-time penalty abatement.

You don’t have an automatic right to penalty abatement and must submit appropriate documentation demonstrating that you have met the grounds for relief.

Conclusion

Penalties can make it extremely difficult for you to resolve your tax debts. Speak to an experienced tax attorney about how to avoid paying IRS penalties. A tax attorney can also determine if you can contest your tax bill or qualify for other programs for individuals and businesses suffering financial hardship. Contact us today for a consultation if you have a tax problem.