The IRS has been around for a long time, so it’s no surprise that there are many misconceptions about tax collection. In fact, many people seem to think the IRS is some sort of evil force that will jump out of their shadows and take away all of their money if they don’t pay up. This attitude is understandable given how complicated our tax laws can be, but here are five things you should know about penalty abatement – and why it’s not as simple as you might think:
1. The IRS wants you to know that penalty abatement is available only in rare circumstances
The IRS wants you to know that penalty abatement is available only in rare circumstances. In fact, the IRS has a special team dedicated to reviewing cases where taxpayers have paid their taxes late and want their penalties waived or reduced.
The IRS reserves penalty abatement for very specific situations: if you were not aware of your obligation or did not receive proper information prior to filing; if your return was filed without reasonable cause; or if it was filed late due to reasonable cause (not wilful neglect).
2. Understand the definition of “reasonable cause”
What is reasonable cause for IRS penalty abatement? The IRS has a definition for reasonable cause. It’s a legal term and means that you had a good reason for not paying your taxes. If this is the first time you have heard of “reasonable cause,” it’s important to understand what they mean by this and how they use it in their penalty abatement process.
The term comes from the idea of “cause” or “reason.” In law, reasonable cause means that something happened which caused an event to occur (such as being late with your taxes). This can also apply if someone acts in good faith with the intention of paying their taxes but fails because unexpected circumstances arise.
3. Understand what penalties can be abated
There are several penalties that can be abated. Examples include:
- Penalties for underpayments of tax, such as the failure-to-file penalty and false statements penalty
- Interest paid on underpayments of tax
- Tax deficiencies (the amount of extra taxes due)
If you have a legitimate reason for not being able to pay the tax liability on time, your best bet is to take advantage of penalty abatement. If you don’t qualify for this benefit, it’s usually better to make a payment plan arrangement with the IRS rather than risk having an audit or criminal conviction on your record.