What is an IRS Penalty Abatement and Am I Eligible for One?
There are different types of IRS penalties that can be assessed against you. The most common penalties include those for failing to file a tax return, filing your return late, or accuracy-related penalties if you didn’t correctly state items on your tax return. But were you aware that sometimes, the IRS can issue penalty abatements if you believe you’ve been penalized unfairly?
Civil penalties for underpayment, late filing, or erroneous inaccuracy may be eligible for abatement, but criminal penalties for tax protest and willful violations of the law are not. There is also the first-time penalty administrative waiver program (FTA) that applies in certain cases. Here’s what you need to know about successfully fighting IRS penalties and determining eligibility for the waiver program.
What a Penalty Abatement Does NOT Include
Regardless of whether you are trying to secure an ordinary penalty abatement or relief under the FTA program, penalty abatement procedures are only for the penalties themselves. They do not include interest on unpaid taxes, the amount of the taxes themselves, or any related processing fees such as installment agreement setup charges.
If your abatement request is successful, only the interest charged on the penalty would be abated, opposed to interest on unpaid taxes.
Proving Hardship for Failure to File or Failure to Pay Penalties
The failure to file penalty kicks in if you file your tax return late, or not at all, and is based on 5% of your unpaid taxes every month (up to 25% of your total balance due). The best way to avoid this penalty is to file for a six-month extension prior to the tax filing deadline if you don’t think you’ll get your return filed on time. The extension won’t waive interest, taxes, or penalties for failure to pay or deposit, but it will eliminate the failure to file penalty, which is much higher.
The IRS will consider penalty abatement requests provided that you have reasonable cause for not being able to file or pay your taxes in a timely manner. Valid hardships, such as hospitalization, natural disasters, or fleeing domestic violence, are factored into reasonable cause to get certain civil penalties waived.
Failure to pay penalties result from having an unpaid balance due, with 0.5% being charged every month. Simply lacking funds to pay your taxes doesn’t necessarily equate to hardship to file your tax return on time or pay your tax bill. However, if you have a continuous lack of funds due to disability or chronic illness, a death in the family, or similar hardships, you may be eligible for relief from the failure to pay penalty.
First-Time Penalty Administrative Waiver (FTA Program)
Under the FTA program, you can have failure to file, failure to pay, and failure to deposit penalties waived if you were never assessed penalties in the past three tax years or had them relieved because of reasonable cause. Estimated tax penalty (deposit penalty), as is common with self-employed taxpayers, is the only allowable penalty to bear.
You must also be current on all of your current tax returns or extensions and paid any taxes due (or arrangements like payment plans). If your charges include failure to pay penalties, it’s a good idea to wait until you’ve paid the entire balance before requesting FTA waivers since you don’t need to prove hardship and can get more waived.
FTA waivers are the best option if you meet the above requirements as this request takes less time to process than ordinary penalty abatement, because you don’t need to establish reasonable cause or hardship.
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Frequently Asked Questions
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You can prepare your taxes yourself, especially if your business is simple.
But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.
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Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.
That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.
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Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.
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Possibly, if it was truly for your business and you have proof.
Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.
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Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.
The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.
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