IRS Penalty Forgiveness Using Reasonable Cause

Every once and awhile, we make a mistake and must make it right. When it comes to the IRS, saying sorry is not sufficient. The IRS can impose almost 150 types of penalties – most common are caused by late filing and late payment.

There are however ways to abate the penalties assessed against you. The first, which should be used carefully and as a last resort because you only get one, is to ask for the penalties to be forgiven under the first-time penalty abatement request. If you have penalties for multiple years, this will only work for one of them. Please discuss how and when to use this abatement request with your CPA.

Perhaps the best penalty abatement is for reasonable cause. You have to qualify to be able to use it but the IRS can waive penalties it assessed against you or your business if there was “reasonable cause” for your actions. If the IRS accepts the abatement, it will only remove the penalties. It will not impact any interest or tax you may owe.

The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:

• Filing of returns
• Payment of tax
• Accuracy of information

Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.

Here are three instances where you might qualify for reasonable cause relief:

• Your or an immediate family member’s death or serious illness, or your unavoidable absence
• Inability to obtain necessary records to comply with your tax obligation
• Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance

Here are five instances where you likely do not qualify for reasonable cause penalty relief:

• You made a mistake.
• You forgot.
• You relied on another party to comply on your behalf.
• You don’t have the money.
• You are ignorant of the tax law.

If one of the three reasons above apply (and not primarily the five above), you may request that the IRS abate your penalties for reasonable cause. You must provide the reason (one or more of the three) and provide evidence. Your CPA can help you draft the language in your request to the IRS.

Getting your penalties abated can save you hundreds or thousands of dollars.