Taxpayers May Be Able To Obtain Penalty Relief in Certain Circumstances
There are several options for requesting penalty relief. The taxpayer may qualify for penalty relief if they can show the failure to timely file the required return or pay taxes due on time was due to reasonable cause and not willful neglect.
To establish reasonable cause, the taxpayers must show that they acted with ordinary business care and prudence but were unable to file the return within the prescribed time or were unable to pay the tax by the due date or that payment on the due date would cause an undue hardship. The reasonable cause is determined case by case considering all the facts and circumstances. Please consult IRS.gov for types of penalty relief.
First Time Abatement (FTA) may be an option to consider when the taxpayer can show filing compliance, payment compliance, and a clean penalty history.
Taxpayers must show they did not have to file a return or have no penalties assessed against them in the prior three years (or any penalty was removed for an acceptable reason other than FTA, for example, due to reasonable cause); have timely filed all required returns (or filed a valid extension); and have paid or have a valid payment plan to pay all taxes due for years other than the year for which the relief is requested.
Supporting documentation is not required if a taxpayer meets FTA criteria. However, taxpayers must request penalty relief to be considered for FTA. However, I have been in discussions with the IRS to apply FTA relief to taxpayer accounts systemically, when appropriate.
Taxpayers May Take Advantage of IRS’s Collection Alternatives
If taxpayers do not pay their taxes by the due date, they risk not only being subjected to penalties but also to the IRS’s significant collection powers.
As the IRS returns to normal operations, collection activities will resume. Before taxpayers receive any collection notices, they will first receive a balance due notice. These balance due notices relating to the current filing season will be sent out beginning in May. The absolute worst thing taxpayers can do would be to ignore these balance due notices or any other IRS letters and notices because IRS will take aggressive collection actions that can cause severe financial consequences. If taxpayers receive a balance due notice and cannot immediately pay the full amount, there are several collection alternatives they can take advantage of, including:
- A payment plan to pay off the balance over time;
- Settling the tax debt for less than the full amount owed through an offer in compromise; or
- A temporary delay of collection action if the balance is currently not collectible.
The best thing taxpayers can do is arm themselves with the information before their tax return is due and familiarize themselves with the Taxpayer Bill of Rights and Collection Appeal Rights.