The Internal Revenue Service is mandated by law to actively pursue people with tax liabilities. If it has no teeth, tax evaders will not be afraid of this agency. Thus the government has given the IRS the power to enforce harsh penalties for errant taxpayers. These penalties can definitely affect the financial freedom of any person and a goal would be to reduce IRS penalties.
However, there are always various reasons why people fail to file their taxes or to pay the full amount due. The IRS knows there must be room for compassion; this is why they created the IRS Penalty Abatement petition. Under this arrangement, the penalties on your tax liabilities can be reduced or even erased.
The Point of Penalties and ways to Reduce IRS Penalties
The penalties are set in place by the IRS to send a message to taxpayers that compliance with tax laws should be strictly observed. However, if a taxpayer has enough “reasonable cause” to justify their failure to do so, the IRS should be considerate. Taxpayers should never be afraid to challenge, question and appeal when a penalty is enforced on them.
The term “reasonable cause” is determined subjectively. If the failure of compliance is caused by difficult circumstances, the IRS should have the good faith to conduct an investigation of the reasons behind this tax difficulty. There are five basic and typical reasons behind tax penalties:
- Inaccurate Declarations
- Penalty Underpayment
- Failure to File or Late Returns
- Combined Circumstances
To provide an example of how severe these penalties are, let’s take an example of a fraud penalty. If you willfully underreport your income by about $100,000, the IRS will issue a fine of 75% of the underreported amount. The penalty will become $75,000 – not including the interest yet.
The Premise of Reasonable Cause as a method to reduce IRS penalties
The Internal Revenue Manual provides the context of the term “reasonable cause.” It may be a subjective concept but it has clear guidelines.
- A reasonable cause is determined by the facts and circumstances of a tax debtor. This allows the Internal Revenue Service to provide IRS tax relief for the cases involved.
- Businesses and taxpayers who exercised care and prudence in identifying their tax obligations may be given consideration. They must undergo thorough investigation as well.
- The abatement of civil penalties must be made in a consistent manner and must conform with the Internal Revenue Code (IRC), Regulations, Policy Statements and Part 120.1
Strategies and Steps to Reduce IRS Penalties
- Pay off the tax due and interest as quickly as possible. If you can’t pay it in full, there is an available installment scheme for you.
- Highlight the reasons why you had difficulties with paying the penalties. Whether it is a medical problem or a sudden economic hardship, a compelling reason will help convince the IRS to reduce or eliminate your penalties. If there is a human element in your IRS case, you may have a better chance for penalty abatement.
- File your tax returns and attend to other necessary paperwork so that you can get back on track. Afterwards, send a letter to the IRS which requests the elimination of penalties. You need to send it through certified channels to have proof of mailing.
- If the IRS denies your request for penalty abatement, resend it still. In cases where the penalty has become very large, you can also request the Appeals department of the IRS become involved in your case to reduce IRS penalties.
- A simple and cold letter requesting for IRS penalty abatement usually will not get it done. You really have to convey and communicate your difficult position as tax debtor. If this letter of request is done with thorough preparation, your case may stand out in a very beneficial and positive way.
The IRS is not a bunch of stone cold people so you have a chance to reduce IRS penalties. They are just doing their jobs to improve the tax collection in the country. If the reasonable cause of your case is compelling enough, the IRS will provide means to help you overcome and manage your tax debts.