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Tax penalty and interest abatement

With tax penalty and interest abatement you may eliminate all or a part of your interest or penalties. Eliminating these penalties may lift a huge financial burden. Most of the time the penalties may be up to 25% of the total amount owed. For individuals this relief applies to failure to file and failure to pay penalties. For businesses, this also applies to the failure to deposit penalty for payroll taxes.

It’s not uncommon to receive multiple penalties. If you did not file on time and owe tax, for instance, you could be hit with late filing and failure to pay penalties that together would total 5 percent (4.5 percent for late filing plus a 0.5 percent late payment charge) for each month that your return was late, up to 25 percent. Contrary to public belief, the IRS does have a heart where penalties are concerned. Built into its agent handbook are guidelines for determining reasonable cause that might warrant abating a penalty.

The IRS may award you a tax penalty abatement if you can show:

  • Unavoidable absence.
  • Destruction of the business or records by fire or other casualty.
  • Inability to determine the tax because of reasons beyond the taxpayer’s control.
  • Lack of funds, but only when the taxpayer can demonstrate the exercise of ordinary business care and prudence, and
  • Other reasons establishing that the taxpayer exercised ordinary business care but could not comply within the prescribed time limits.
  • State tax penalty and interest abatement: each state has their own rules for allowing individuals or businesses to abate penalties. If you can qualify for IRS penalty abatement you will usually qualify for state tax penalty abatement.

The Internal Revenue Service recently updated policy to modify its First Time Abate policy for penalty relief. This type of penalty removal for taxpayers is a one-time consideration available only for a first-time penalty charge and based on taxpayers’ compliance history. According to policy, the FTA penalty relief option for failure to file, failure to pay and failure to deposit penalties, under certain conditions, does not apply if the taxpayer has not filed all returns and paid, or arranged to pay, all tax currently due. For example, the taxpayer is considered current if they have an open installment agreement and are current with their installment payments. The FTA relief only applies to a single tax period for a taxpayer. For example, if a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods.

 

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