What Are the Most Common Tax Penalties & How Can You Avoid Paying Them?
The IRS charges tax penalties for all sorts of reasons, from filing taxes late to having no health insurance, and paying less than you owe or even underestimating your quarterly tax payments.
Basically, if you do anything wrong when it comes time to filing your taxes, the IRS is going to punish you by levying a tax penalty that requires you to pay an additional amount of money.
The most common tax penalty is assigned when you owe taxes and file them late, which results in having to pay a penalty for being late, as well as paying interest on top of the amount you need to pay, based on how much you owed and how late you end up paying the IRS back.
This Guide walks you through each type of IRS tax penalty, clearly explaining when they’re triggered, how much you’re penalized, and what you can do to avoid having to actually pay the penalty (yes, it IS possible to get out of paying IRS penalties!).
Quick Links to Topics Covered Within This Guide
To make it as easy as possible for you to access the information you truly need, feel free to click through the links below to be taken to each specific section covered in this Guide.
- When Does the IRS Issue Penalties?
- What Are the Most Common IRS Penalties?
- The Penalty for Underestimated Quarterly Tax Payments
- The Penalty for Failure to Timely File Your Tax Return
- The Penalty for Failure to Timely Pay Your Taxes
- The Penalty for Failure to Timely Pay Taxes After Issuance of Notice
- The Penalty for Accuracy-Related Issues
- The Penalty for Dishonored Payments (Bounced Checks)
- The Penalty for Unpaid Withholding Taxes (Payroll Taxes)
- The Penalty for Failing to Provide Foreign Information
- Penalties as Excise Taxes (Tax Stamps, Manufacturers, Retailors, Pension & Benefit Plans, Charities & Private Foundations)
- The Penalty for Tax Fraud & Tax Evasion
- The IRS Penalty Calculator
- IRS Penalty Relief (via Penalty Abatement)
- Penalty Abatement via Reasonable Cause
- Penalty Abatement via Administrative Waiver & First Time Penalty
- Penalty Abatement via Statutory Exception
- The IRS’s Online Penalty Appeals Tool
- The IRS Penalty Abatement Customer Service Hotline
- Interest Charges on Penalties & Unpaid Taxes
- The IRS’s Interest Reduction Policy
- What Should I Do?
- Other Questions
If you have questions about anything that you didn’t find covered in this Guide, please feel free to post them in the Comments section below and I’ll do my best to get you a response within 24 hours.
But Before We Get Started…
Before I go through all the details about how IRS Tax Penalties and IRS Tax Penalty Abatement works, let me give you some quick advice: if you owe the IRS money, and you can’t afford to pay it, then the fastest, easiest and cheapest way to deal with it is to pay an expert to negotiate with them on your behalf.
While you’ve probably been told that Tax Resolution Services can’t do anything you can’t handle entirely on your own, that’s not necessarily the case, because professional IRS negotiators know all the tricks required to deal with the IRS and reach the best possible debt settlement.
Just think – how many times have you Negotiated an IRS Settlement? How much do you know about the IRS’s Fresh Start Program, or about the IRS’s Tax Debt Forgiveness opportunities? Do you know How to Stop an IRS Wage Garnishment?
The experts at the Tax Debt Relief Helpline are fully versed in all of these processes; they’ve negotiated thousands of back taxes cases, and they can help you take care of your IRS problems for a nominal fee, typically saving hundreds to thousands of dollars in the process.
To get effective help with your IRS debt, please call the Tax Debt Relief Helpline now at 1-888-692-7108.
When Does The IRS Issue Penalties?
One thing to keep in mind about IRS penalties is that you will only ever receive one if you actually owe taxes, and don’t end up filing and paying them on time.
What I mean by that is that if you make so little money or have such creative accounting that you never actually owe the IRS any money, then it’s impossible for you to be hit with a penalty, even if you file late or fail to file entirely.
To get assigned a tax penalty, you have to owe the IRS money, and fail to pay up by the deadline, or you have to get caught attempting to get out of paying the money you owe by hiding information, failing to account for income, lying about expenses, or attempting some kind of tax fraud.
Unfortunately, this is an easy position to fall into since the IRS is one of the least flexible, most complicated and most demanding money lenders in the history of the world.
Why do I say that? Because unlike everyone else you pay money to, the IRS doesn’t provide you with a bill for what you owe (it’s your responsibility to determine what you’re supposed to pay), doesn’t offer free extensions to your due date deadlines, and wants you to pay them everything you owe all at once.
With that said, let’s take a quick look at the most common IRS tax penalties.
What are the Most Common IRS Penalties?
As I mentioned above, if you owe the IRS money and you don’t pay it on time, if you don’t pay as much as the IRS is expecting to receive, or if you get caught attempting to evade paying taxes, then you’re going to get hit with a tax penalty.
There are all sorts of ways to trigger an IRS tax penalty, but here’s a list of the most common problems that generates additional fines and fees from the IRS:
- Underestimated Quarterly Tax Payments
- Failure to Timely File Your Return
- Failure to Timely Pay Your Tax
- Failure to Timely Pay After Issuance of Notice
- Accuracy-Related Penalties (Under-calculations, Careless Mistakes, etc.)
- Bounced Check Penalties
- 100% Penalty on Unpaid Withholding Taxes
- Penalties for Failing to Provide Foreign Information
- Excise Taxes as Penalties
- Tax Fraud Penalties
- Tax Adviser Penalties
As you can see, the list of potential IRS penalties is quite long, and can be triggered in a variety of ways, but the most common penalties occur when you pay your taxes late, or when you pay less than the amount of money that the IRS thinks they’re owed.
Now, let’s look at each type of common tax penalty in detail.
The Penalty for Underestimated Quarterly Tax Payments
The IRS considers its tax system as a “pay-as-you-go” process, which means that you’re supposed to be making tax payments as you earn income throughout the year.
These “payments” can be issued in the form of tax withholdings, or as quarterly payments that are literally sent to the IRS every three months.
Anyone who pays too little taxes throughout the year, either by withholding too little money, or by paying too little each quarter, may end up facing a penalty for underpayment of estimated tax.
The best way to avoid this penalty is to issue estimated payments in four equal amounts, unless your income varies throughout the year.
If you do get hit with an underestimated quarterly tax payment penalty, then the good news is that there are two ways to get the IRS to waive the penalty by explain that you didn’t make a requirement payment amount because:
- You experienced a casualty event, disaster, or other unusual circumstance that resulted in it being inequitable to impose the penalty, or
- You retired or became disabled during the year the payments were due, and the underpayment was the result of reasonable cause, rather than willful neglect
If you can’t make either of the claims above, then you’ll be forced to pay the penalty. To determine how much your Underpayment of Estimated Tax Penalty will be, see IRS Form 2210.
The Penalty for Failure to Timely File Your Tax Return
If you miss the April 15th deadline for filing your tax return, then you’ll be slapped with an IRS penalty called the “Failure-to-File Penalty for Late Filing”.
While that sounds like a stupid name, this penalty is serious business, as the late filing penalty will typically be assigned at 5% of the unpaid taxes for each month or part of a month that your return is filed late, capped at 25% of your total unpaid taxes.
And that’s no joke, because that 5% adds up quickly, especially if you owe a ton of taxes, and especially because it’s so easy to avoid this penalty by simply filing your taxes on time – even if you can’t afford to pay at the time of filing!
If you file your return more than 60 days after its due date, you’re going to face a minimum late filing penalty of either $135, or 100% of the unpaid taxes, whichever is smaller. Don’t forget that this is just the minimum amount you’ll end up owing, it could be substantially more!
The best way to avoid this penalty is to simply file your taxes on time, but if you can’t manage to do that, then you do have a couple options for attempting to avoid actually paying the penalty, including:
- Requesting a tax deadline extension before your taxes are due, and paying 90% or more of whatever taxes you owe
- Showing that you had “reasonable cause” for not filing your taxes on time
The best option is obviously number 2, as that allows you to completely eliminate the penalties the IRS has assessed against you, but it’s not all that easy to qualify for reasonable cause abatement.
See my section below on Reasonable Cause for details about how this process works.
The Penalty for Failure to Timely Pay Your Taxes
The most common tax penalty issued is the one for making your tax payments late, as this is the easiest one to trigger since the IRS always wants you to pay taxes in a single, lump-sum payment, rather than stretched out over a period of months and years.
The thing to know about this sort of penalty is that determining the amount you owe becomes a complicated process, because it depends on how much you owe, as well as how late your payment is made.
You may even get hit with two different penalties; first, the penalty for late filing, and second, the penalty for failing to pay on time.
I’ll explain the late filing penalty below, but the penalty for late payment is typically 0.5% per month of your unpaid taxes, which gets applied for each part of a month that your taxes remain unpaid, and which starts accruing the day after your taxes are due.
The maximum amount you’ll be hit with here is 25% of your unpaid taxes, no matter how late you are in making that payment.
There are two ways to avoid this penalty, each of which are excellent options worth looking into if you’re being hit with it, including:
- Requesting a tax deadline extension before your taxes are due, and paying 90% or more of whatever taxes you owe
- Showing that you had “reasonable cause” for not paying your taxes on time
The key to avoiding this tax penalty is to pay your taxes by their due date, but if you can’t do that, then the best way to reduce your potential penalty is to pay whatever amount you can afford before the due date, even if it’s not the entire amount owed, as that will at least reduce the total amount of your penalty.
The Penalty for Failure to Timely Pay Taxes After Issuance of Notice
This is where things get truly devastating for people who owe the IRS money, because even if you’ve already been hit with a Failure to File Penalty, and a Failure to Pay Penalty, you could get slapped with an ever bigger fine for failing to pay your tax debt by the date required in your official Notice of Deficiency (also called the “90 Day Letter”), which is the IRS bill you receive after failing to pay your taxes by April 15th.
Here’s how it works – whether or not you filed on time, if you didn’t pay your taxes in full by the original April 15th deadline, then the IRS will send you a bill in the mail, via certified mail, which details the exact amount of money you owe, and with a new deadline for paying up.
If you can’t make your payment by the time that new deadline rolls around, then you get hit with the “Penalty for Failure to Timely Pay Taxes After Issuance of Notice”, which is another additional fine layered on top of the previous penalties, the Failure to File on Time, and Failure to Pay on Time.
This is a bad penalty to receive, because it includes interest which starts accruing on any unpaid taxes from the date that your return was originally due (April 15th), until the date that you pay your taxes in full.
The interest rate is set quarterly, and the rate used to determine your interest penalty will be the federal short-term rate, plus 3%, compounded DAILY! This means that you could end up owing a great deal of money on an insignificant debt, so as I’ve stated earlier, your best option here is to make sure that you never fall into the situation where this penalty is applied to your account.
It’s a much better idea to confront your tax issues head-on, pay whatever amount you can afford, and enroll in an IRS Installment Agreement to prevent yourself from getting hit by this most unfortunate of penalties.
The Penalty for Accuracy-Related Issues (Under-calculations)
The penalty for under-calculations is quite serious, but only comes into play when the IRS considers the underpayment of taxes to be the result of “negligence” or “disregard” of their rules or regulations, or, when a “substantial understatement” of income tax was claimed.
Basically, you’re only going to get hit with this penalty if you or your tax preparer make a major mistake in your return, and if the IRS thinks that you did it on purpose in order to get out of paying the taxes you truly owed them.
To determine if you were “negligent”, the IRS looks at your process for complying with the provisions of the tax code, and evaluates your willingness to accurately keep books or records to substantiate items properly.
If they determine that you didn’t try hard enough to keep track of your income, expenses, and the rules revolving around determining how much you owed in taxes, then they’ll slap you with the penalty, and that’s a big deal, because this one is substantial.
To be found in “disregard” for IRS rules requires that they think you were careless, reckless, or intentionally disregarding the rules about how to calculate your return, which again sounds like it requires proving you purposefully avoided properly calculating the amount of taxes owed.
Finally, if the IRS wants to use the “substantial understatement” qualification against you, then they’ll need to prove that your calculations were off by more than 10%, or at least $5,000, either of which would qualify you for the penalty.
The penalty for an under-calculation of this nature is 20% of the portion of the underpayment of tax due, which means you could be looking at a much higher tax bill than you should have faced, so as I said earlier, this is a penalty you’ll want to avoid at all costs.
Fortunately, just like I’ve shown for most of the other penalties above, the reasonable cause clause allows you to get out of paying this penalty if you can prove that your accuracy issue wasn’t malicious or intentional, but the result of a good faith action on your part.
This is where things get tricky, as you’ll need to convince the IRS agent who reviews your case that you made a simple mistake, and that you had good logic behind the calculations which determined your under-calculation.
The Penalty for Dishonored Payments (Bounced Checks)
The penalty for bounced checks is officially referred to as a “Dishonored Payments Penalty”, and covered in IRS Topic Number 206, which lays out the rules for what happens if your payment to the IRS doesn’t clear.
If you bounce a check, or an electronic payment doesn’t transfer enough funds, or if something else goes wrong with your payment, then the IRS will send you Letter 608C, the “Dishonored Check Penalty Explained”, which explains that your payment didn’t make it through and that your taxes remain unpaid.
The IRS won’t attempt to resubmit any payments that don’t clear, but the clearinghouse may, and it becomes up to you to decide if you want to give it a few days to see if the second attempt to pay makes it through, or if you need to issue another payment instead.
If the second attempt by the clearinghouse makes it, then you won’t be hit with the dishonored check penalty, but it goes through after your due date, then you may end up being charged interest and a penalty for late payment, so that’s something to take into account as well.
The Dishonored Check Penalty is calculated at an amount of 2% of the total amount of the check, but if your payment is less than $1,250, then the penalty will be $25, or the amount of the check itself (whichever is the lower amount).
If you’re hit with the Dishonored Check Penalty, it is possible to get out of it via penalty abatement, but you’ll be required to explain why the payment didn’t make it through, in writing, and you’ll basically just have to hope that the IRS agrees that it wasn’t your fault.
Finally, you won’t be assessed a Dishonored Check Penalty if you placed a stop payment order on the check you sent the IRS, so if you did that, then get hit with the penalty, you’ll need to provide the IRS with a copy of your stop payment request, in addition to your request for penalty relief, and you may be able to get the penalty removed.
In reality, this is one of the least harmful penalties, at just 2%, so it’s not that big of a deal unless you owed the IRS a huge amount of money when your payment failed to go through.
The Penalty for Unpaid Withholding Taxes (Payroll Taxes)
This penalty only applies to business owners or employers, as it is only ever used to penalize someone who fails to collect, report and pay payroll taxes, as required by both federal and state laws.
What are payroll taxes? These are the federal and state income taxes that are supposed to be withheld from employees pay and instead sent to the IRS or state taxing body, like FICA taxes (Social Security and Medicare), Federal unemployment taxes, and State unemployment taxes.
To be hit with the unpaid withholding taxes penalty, you have to be the “responsible party” (typically a corporate officer, CPA, etc.) who fails to make the proper withholding payments, so if you aren’t directly responsible for any of this stuff, then you’re not going to have to face this penalty, but if you are, the important note to realize is that you become personally liable for any deficiencies, and that the penalties can be extreme.
Unfortunately, the penalties here are also extremely complicated, so I’m just going to briefly outline what you may be facing, which could include:
- A Failure to File penalty set at 2% for being 1-5 days late, 5% for being 6-15 days late, 10% for being over 16 days late, with the maximum amount of the penalty pegged at 15%
- A Trust Fund Recovery Penalty for failing to pay payroll taxes when they’re due, which will be 100% of the unpaid tax (including income tax, social security and Medicare withholdings)
- An Interest penalty on whatever amount of taxes go unpaid, until they’ve been repaid in full
- Potential Jail Time
One quick thing to note is that even if you use a payroll service or you outsource the payroll tax work to someone like a CPA, tax attorney, or other employee, you’re still responsible for ensuring that payroll tax returns are filed and paid correctly, and timely.
If the IRS really wants to press the issue because they think you’ve exhibited a willful failure to collect and pay these taxes, they can even pursue criminal charges against you and you could be hit with a felony punishable by up to $10,000 in fines, or a five year prison sentence, or both.
Let’s be clear about one thing – you do not want to get hit with this penalty, so you need to be extremely careful in ensuring that any payroll taxes that you could be responsible for are being taken care of properly.
The IRS loves making examples out of people who fail to properly handle withholdings, and has imprisoned many people who violated the payroll tax rules. Don’t become one of them!
The Penalty for Failing to Provide Foreign Information
There are several different types of penalties for failing to provide foreign information on your tax return, with one type applying to people who have offshore bank accounts, international earnings or inheritances from outside of the United States, while a different one applies to people who are shareholders of controlled foreign corporations.
Basically, the difference is that one is about personal income, while the other is about corporate income, and the rules and penalties for each are wildly different, but I’ll give you a brief overview of how they work below.
But first, let me explain a huge opportunity for anyone facing foreign disclosure penalties! In 2009, the IRS realized that this was a huge problem so they created the Offshore Voluntary Disclosure Program (abbreviated OVDP) which allows you to voluntarily get back into compliance with IRS rules.
Why would anyone voluntarily get back into compliance when they’ve been getting away with failing to disclose foreign assets? Because OVDP offers reduced penalties, promises that you can avoid criminal prosecution, and even insinuates that you won’t face investigation or an audit as long as you follow the rules of the program.
If you’re facing a Foreign Disclosure Penalty, then you should definitely look into the OVDP program because it’s probably going to be your best bet for getting back into compliance, and avoiding the serious repercussions possible for violating relevant IRS rules.
Now, getting back to the penalties themselves, on the personal income side, which applies to the group of people who have hidden information about offshore accounts, international earnings or inheritances, there are two types of potential penalties: one for “willfully” hiding the information, and one accidentally hiding it.
People found “willful” are those the IRS determines hid the information on purpose in order to reduce their tax liabilities (basically committing tax evasion), and this group can be hit with a penalty of $100,000 or more, or 50% against the unreported foreign accounts or assets, whichever amount is higher.
People found “not willful” face a much smaller potential issue, because the IRS offers something called the “Streamlined Filing Compliance Procedures” or SCFP Program, which is essentially the best option for anyone with unreported foreign assets, and which carries much smaller penalties.
For people who aren’t dealing with personal finances, but who are shareholders of controlled foreign corporations, and who haven’t disclosed those details, the penalties can also be quite extreme, including penalties for failing to file the proper forms, penalties for being late on payments, etc.
Penalties for failing to file certain forms (like Form 5471) can be as high as $10,000 to $50,000 per form and the failure to file form penalty can be increased by $10,000 per month per form for continued failure to file, so you can imagine how quickly the costs can stack up here.
U.S. Citizens or taxpayers who are beneficiaries of foreign trusts or who make transfers of properties to foreign trusts must also report the details of those transfers via Form 3520 or Form 3520-A, which can result in penalties of up to 35%!
Finally, any transfer to foreign corporations need to file Form 926 or they can get slapped with penalties of 10% of the value of the transfer, up to $100,000. As you can imagine – there’s some serious penalties in play here, so this is definitely an area of tax laws to remain in compliance with.
Penalties as Excise Taxes (Tax Stamps, Manufacturers, Retailors, Pension & Benefit Plans, Charities & Private Foundations)
Excise taxes are taxes required by the Federal Government, and applied to goods and services sold within the United States.
Sometimes, excise taxes require manufacturers or retailers to purchase tax stamps or other proof that they’ve collected an advance payment of the tax on the goods and services they sell.
Anytime that an entity fails to fulfill this obligation, the IRS can hit them with a significant tax penalty.
Other penalties that are applied in the form of excise taxes are used against Pension or Benefit Plans that violate IRS rules, and against Charities or Private Foundations who carry-out prohibited transactions, or who otherwise fail to satisfy other rules of the IRS tax code.
These penalties are pretty complicated, and are rarely applied to individuals, so I’m going to write about them in detail at another time, and will share my guide on that with you as soon as it’s ready.
The Penalty for Tax Fraud & Tax Evasion
While the terms are often used interchangeably, tax fraud and tax evasion are treated differently by the IRS, so the first thing you need to determine is which of these issues you could be facing, because the consequences for being found guilty are dramatically different.
To be hit with a penalty for either tax fraud or tax evasion, the IRS has to prove that you weren’t simply negligent, or ignorant about the tax code, but that you willfully and purposefully attempted to deceive them by committing some kind of illegal behavior for the purposes of avoiding or reducing your tax liabilities.
To quickly explain the difference between tax fraud and tax evasion, tax fraud happens when you illegally and intentionally try to evade tax laws or defraud the IRS, while tax evasion occurs when you illegally refuse to pay your taxes, or when you purposefully underpay your taxes by not reporting income or by reporting illegal expenses.
If you attempt to evade paying taxes, and are convicted, then you’ll be found guilty of a felony and you could be sentenced to up to 5 years in prison, and forced to pay a fine of up to $250,000 (for individuals) or $500,000 (for corporations), plus the costs associated with prosecuting your case.
If you attempt to commit fraud of issue false statements to the IRS, and are convicted, then you’ll face a felony charge and will be imprisoned for up to 3 years, plus be forced to pay a fine for up to $250,000 (for individuals) or $500,000 (for corporations), as well as the paying for the costs of prosecution.
If you refuse to file a return, supply information, or pay your taxes as required by law, then you can be found guilty of a misdemeanor and subject to penalties including imprisonment for up to 1 year, and a fine for up for $100,000 (for individuals) or $200,000 (for corporations), plus prosecution costs.
In addition to the criminal penalties mentioned above, you can also be charged with a civil penalty as well, which can add up to 75% of your unpaid taxes attributable to fraud, in addition to whatever taxes you already owed.
Obviously, any of these situations would be terrible, so you’ll want to avoid them at all costs. If you get accused of tax fraud or tax evasion, my advice is to immediately hire an attorney who specializes in these sorts of cases so that they can represent you in court.
For most of the penalties and issues I’ve outlined here, I think you can handle them entirely on your own, but with tax fraud or tax evasion, you’re going to be fighting an uphill battle, and the consequences for losing your case against the IRS are too serious to be faced without the help of an actual expert.
The IRS Penalty Calculator
The fastest way to determine which penalties you may be facing, and how much you might owe, is to refer to one of the IRS Penalty Calculators floating around the web.
While I can’t guarantee that any are accurate (there are a LOT of factors that go into determining certain penalties!) I would definitely suggest that you take one or two of the public calculators for a spin to see what the results look like.
I’m not going to link to any specific calculator, because they’re easy to find with a simple Google search, but just be aware that these should only be considered to provide an estimate of what you actually owe, and don’t be surprised if the site you visit tries to get you to pay for the use of their calculator either.
Alternatively, the most accurate way to figure out what you owe, and what you should do about it, is to contact the Tax Debt Relief Helpline; because they’re the only experts that I refer my readers to, and the only tax resolution service that I trust to get the job done right.
To get expert assistance with your IRS trouble, call the Tax Debt Relief Helpline now at 1-888-692-7108.
IRS Penalty Relief (via Penalty Abatement)
As I mentioned repeatedly above in the section on different types of IRS penalties, there is almost always a chance to have your penalties dropped, or at least forgiven, by pursuing what’s known as IRS Penalty Abatement.
This is the process of appealing a penalty that’s been assigned to your account, which typically requires providing the IRS with additional details about your finances, and most importantly, an explanation of why the penalty they’ve slapped you with doesn’t actually deserve to exist.
If you can prove to the IRS that they made a mistake in determining your penalty, or that you have new information which proves that you don’t deserve to be penalized, then it’s possible to get the penalty reduced or even removed entirely, which could save you a substantial sum of money.
There are three options for pursuing IRS penalty abatement, and they’re called:
- Reasonable Cause
- Administrative Waiver and First Time Penalty Abatement
- Statutory Exception
Below, I’ll provide details on each of these paths to penalty relief so that you can determine if any of them may work for your specific situation.
Option 1: Reasonable Cause Penalty Abatement
The Reasonable Cause Penalty Abatement Program lets you request the IRS review your case and consider that you made a simple mistake in filing, calculating or paying your taxes, and that you don’t actually deserve to be hit with a penalty because you weren’t trying to get away with anything illegal.
Essentially, this program lets you say that you tried to “meet your Federal tax obligations but were nevertheless unable to do so”, which means you’ve going to admit that you did something wrong, but make the claim that you’re sorry and that it won’t ever happen again.
You can use all sorts of reasons for explaining your failure, from facing a natural disaster to being unable to obtain required financial records, explaining that you were imprisoned, or that a loved one died and that this prevented you from being able to take care of business.
The thing to keep in mind here is that you need to go into detail, explaining what happened, what went wrong, why you weren’t able to take care of your filing, payments, or whatever else you were supposed to do, and clearly explain that you want to make good on your mistake by getting back into perfect standing with the IRS.
Unfortunately, the worst part of the reasonable cause process is that you’ll basically be at the mercy of whoever reviews your case at the IRS, and if they disagree with your argument, then they can simply say “Too bad”, and you’ll still need to deal with the penalties applied to your account.
Option 2: Administrative Waiver and First Time Penalty Abatement
The Administrative Waiver and First Time Penalty Abatement Program allows you to apply to have a penalty removed if it’s the first time that you’ve ever faced it, or if you received “incorrect oral advice from the IRS”, which lets you qualify for the administrative relief component of the program.
This is a great way to drop penalties, fines and fees if you’ve never run into trouble with the IRS before, like if this is the first time your taxes became ultra-complicated, and you simply didn’t know what you were supposed to do, or how to handle your tax obligations.
Keep in mind that to qualify for this penalty abatement program, you’ve got to be in good standing with the IRS, outside of this single issue, and that you have to be capable of proving that:
- You have not faced any IRS penalties for the last 3 tax years prior to the year you’re receiving a penalty
- You filed all the required returns or requested an extension before the April 15th due date
- You have already paid, or have made arrangements to pay, whatever taxes were due (other than the amount you didn’t realize that you owed, and which you’ve been penalized for!)
One thing to consider here is that even if you’re approved for this penalty abatement program, your failure-to-file penalty is going to continue accruing interest until the second you fully pay back whatever it is that you owe the IRS.
Knowing that, the best time to apply for the Administrative Waiver and First Time Penalty Abatement Program is almost always after you’ve gotten your account in line with IRS rules, and finishing paying off whatever amount of money you owed the IRS.
Basically, you should use this penalty abatement opportunity as an after-the-fact way to get a refund on whatever penalty you ended up paying the IRS, because if you request the abatement early, but don’t have the money to pay back your debt, then the failure-to-file penalty will keep accruing and you won’t receive forgiveness for any additional debt that accumulates after your approval.
Option 3: Statutory Exception Penalty Abatement
The Statutory Exception Penalty Abatement Program is the third and final way to get rid of IRS penalties, and this one is an excellent way to get out of a penalty, but only if you can prove that you were given improper advice about what you were supposed to do with your taxes.
Basically, this program requires proving that you received incorrect written advice from the IRS (vs. the Administrative Waiver Abatement which helps with improper oral advice), but this one may be easier to qualify for because if you really did receive improper written advice, you should have a record of it, and it’ll be easy to prove!
Statutory Exception abatement approvals will require proving that you wrote a letter requesting advice from the IRS, that you received erroneous written advice in response to your original request, and that the penalty applied to your account was the direct result of this improper advice.
To qualify for statutory exception forgiveness, once you’ve determined that you deserve to have your penalty dropped, you’ll need to fill out IRS Form 843, the official Claim for Refund and Request for Abatement document, which provides the IRS with all the required details of your account so that they can decide whether or not you truly deserve to have your penalties lifted.
The IRS’s Online Penalty Appeals Tool
One nice thing about the IRS and their penalties is that there is a process for appealing a penalty relief request that’s been denied, and the best thing about this process is that it’s fairly simple to start an appeal, because you can do it using the IRS’s Online Penalty Appeals Tool!
This tool was created to help the IRS quickly process any mistaken penalty relief rejections, and it gives you a second chance on applying for penalty abatement, but it requires providing additional documentation or at least reasoning for why your denial should be reversed.
You’ll want to use the online penalty appeals tool if and only if:
- You were hit with a failure to file or failure to pay penalty
- You already sent a written request asking the IRS to remove that penalty
- Your written request for penalty abatement was rejected
- You received a Notice of Disallowance, which provides you with details on your rights to appeal the decision
Attempting to use the tool before any of the previous conditions have already occurred will mean you’re wasting both yours and the IRS’s time with your appeals request, and could definitely end up in preventing you from receiving any form of relief in the future.
Keep in mind, the IRS has a limited number of agents and doesn’t want to spend time reviewing erroneous appeals claims; if you truly do deserve to be hit with a penalty, but you keep pushing to have it removed, all you’re going to do is piss them off and invite further inspection (perhaps via additional investigations or even an official Audit, which could end up costing you even more money!).
The IRS Penalty Abatement Customer Service Hotline
If you want to file an appeal of the penalty abatement rejection, but don’t want to use the online appeals tool, then you also have the option of calling the IRS directly to make your request over the phone.
This is a faster, more streamlined approach to the process, because it doesn’t require waiting for an email response and sitting in limbo while things are happening behind the scenes, so for anyone in a hurry, the phone number is probably a better option than the online tool.
To get help from the IRS directly, you can call their toll-free customer service phone number at 1-800-829-1040.
Keep in mind that you only have 30 days from the date that your penalty abatement rejection was received to file an appeal, so you definitely don’t want to sit around hoping that the IRS is going to change their mind out of the kindness of their hearts.
If you really think that the IRS made a mistake in rejecting your penalty abatement request, then it’s important that you get in touch with them right away.
Interest Charges on Penalties & Unpaid Taxes
With all this talk of penalties, one thing I haven’t quite made clear enough is the fact that you’re not just being hit with the penalty (a fine, fee, or additional charge), but that you’ll also face interest accumulation on your debt, as well as the penalty, for as long as it goes unpaid.
This is the most important part of the tax penalty process, because typically, it’s the one that ends up costing you the most money, especially if your taxes or penalties go unpaid for a long period of time.
Fortunately, the IRS offers extremely clear guidelines about when and how they charge interest, and you can find that information by reviewing my Guide to IRS Interest for Individuals.
To save you some time if you don’t need all the details, here’s a simple breakdown of how the process works – the IRS charges interest on any unpaid balance, according to the following rules:
- Interest will be charged on unpaid taxes, penalties and previously accumulated interest until your debt is paid in full
- Interest accumulates daily
- The interest rate is set quarterly (every three months)
- Interest for the Failure to File Penalty or for Accuracy of Information Penalties will begin on the date your return was due (including requested filing extensions)
- Interest on the Failure to Pay Penalty, on Estimated Tax mistakes, and on Dishonored Check Penalties will begin on the date you were notified of the penalty in writing (the date on your notice letter)
To make sure you don’t turn your annoying tax penalty into an absolute nightmare, you’ll want to be absolutely certain that you pay your tax debt and penalties off as quickly as possible, otherwise the interest rules outlined above could turn your small debt into a massive one that becomes virtually impossible to ever pay off.
The IRS’s Interest Reduction Policy
Note that you may be eligible for the IRS’s Interest Reduction Relief Program if any of your back taxes or penalties are reduced, and that the IRS will automatically calculate the reduced interest on your behalf.
However, this will only happen if the interest you owe racks has accumulated “due to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act”.
You will not be able to have interest charges removed or even reduced for reasonable cause or first-time relief penalty abatement, as that interest will continue to accumulate until the point that your taxes are fully paid.
What Should I Do?
If you’re facing an IRS penalty, for any reason, then the first step in determining what to do will be to figure out which penalty (or penalties) you’re being hit with, how much you owe, and whether or not you can qualify for penalty abatement.
The fastest, easiest, and least stressful way to determine all of the information above is going to be hiring an expert Tax Resolution Agency to review your case and negotiate with the IRS for you, as your official representative.
Why do I suggest this instead of handling everything yourself? Even though some people would argue that these experts can’t do anything for you that you aren’t able to accomplish on your own, entirely for free, you’re simply much more likely to get a better result by letting an expert take care of everything for you.
Remember, IRS agents spend 40+ hours a week dealing with tax-related issues, while you’ve probably spent about 4 hours thinking about this over the past year; who do you think is going to know more about the ins and outs of the IRS Tax Code?
Paying an expert to handle your tax debt for you saves you time, money and stress, but most of all, it can prevent you from making your situation even worse by adding additional interest, penalties and perhaps even an audit or jail time.
My personal opinion is that the benefits to hiring an expert far outweigh the costs, which is why I recommend that all of my readers call the Tax Debt Relief Helpline to get their assistance in dealing with their IRS problems.
To get an expert’s help handling your case, call the Tax Debt Relief Helpline now at 1-888-692-7108.
Where Can I Go For Other Questions?
If you need IRS Debt Relief, be sure to check out some of the other pages of my site, where I go through each of the IRS’s most popular debt relief programs in detail.
Some of the most important pages that you should review include my Guide to Paying Back Taxes, my Guide to Tax Debt Forgiveness, my Guide to Tax Settlements, my Guide to Tax Resolution Services, my Guide to the IRS Collections Process, and my Guide to the IRS Fresh Start Program.
You should also look at the IRS’s Taxpayer Bill of Rights, which explains what the IRS and their Private Debt Collection Agencies can and cannot legally do in an attempt to get you to pay them what they claim you owe.
Finally, if you have any other questions about taxes or the IRS, please feel free to post them in the Comments section below and I will get you a response as quickly as possible.
Disclaimer: Information obtained from Forget Tax Debt is for educational purposes only. You should consult a licensed financial professional before making any financial decisions. This site receives some compensation through affiliate relationships. This site is not endorsed or affiliated with the U.S. Department of the Treasury, the IRS or any other Government Organization.