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Are You Eligible for Penalty Relief from the IRS?

News, Offshore Account Update

Posted in on December 16, 2022

Taxpayers who fail to timely meet their obligations to the IRS can face immediate penalty liability. Penalties for late filings and payments are in addition to the interest that accrues on any taxes owed, and interest accrues on taxpayers’ penalty liability as well.

Taxpayers who incur penalties can file for relief in some cases. Specifically, the IRS offers penalty relief for:

  • Accuracy-related underpayments
  • Delinquent information returns (including foreign financial account disclosures)
  • Dishonored checks
  • Failure to deposit employment taxes
  • Failure to file
  • Failure to pay
  • Underpayment of estimated tax
  • Other penalties “as applicable” (i.e., COVID-19 Penalty Relief)

But, not all taxpayers are eligible. The IRS offers three specific types of penalty relief, and taxpayers must successfully apply in order to have their penalties (and the associated interest) removed.

Three Types of IRS Penalty Relief

Here are the three circumstances in which U.S. taxpayers may qualify for penalty relief:

1. First-Time Penalty Abatement and Other Administrative Waivers

As the IRS explains, “[y]ou may qualify for relief from a penalty by administrative waiver if it's your first tax penalty or you meet other criteria allowed under tax law.” The IRS offers first-time penalty abatement for failure to deposit, failure to file and failure to pay during a single tax period. Administrative penalty waivers are available in other limited circumstances as well, such as when the IRS is delayed in releasing guidance on new tax legislation.

2. Reasonable Cause

The IRS also offers tax relief to taxpayers who are delinquent despite acting “with reasonable cause and in good faith.” The IRS considers reasonable cause penalty waiver requests case-by-case, “considering all the facts and circumstances of [the taxpayer’s] situation.” As possible examples of reasonable cause, the IRS lists:

  • Fires, natural disasters and civil disturbances
  • Inability to obtain necessary records
  • Death or serious illness
  • Unavoidable absence of the taxpayer or immediate family
  • System issues that prevent timely e-filing or online payment

As examples of issues that do not constitute reasonable cause, the IRS lists:

  • Reliance on a tax professional
  • Lack of knowledge about the taxpayer’s obligations
  • Mistakes on taxpayers’ returns  
  • Oversights regarding due dates
  • Insufficient funds to pay taxes owed  

3. Statutory Exceptions

Taxpayers can also seek penalty relief based on certain statutory exceptions. The IRS currently recognizes four such exceptions:

  • Receiving and relying on incorrect written advice from the IRS in response to a written request for information
  • Mailing or e-filing on time but incurring a penalty due to processing delays or an e-filing system rejection
  • Living in a federal disaster area during the relevant filing period
  • Being involved in military operations in a combat zone during the relevant filing period

Discuss Your Options with Tax Lawyer Kevin E. Thorn in Virginia

If you live in Virginia and have questions about filing for penalty relief with the IRS, we encourage you to contact us for more information. To request an appointment with tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 703-752-3752, email ket@thornlawgroup.com or inquire online today.

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