If you’re caught in back tax debt to the IRS, your financial situation is – to say the least – a difficult one. And it can get worse with the IRS tacking penalties and interest onto the original debt. That’s why knowing how to request abatement of IRS penalties can be a financial savior.
IRS tax debt isn’t just the principal. Like with any loan, there will be interest to pay. It’s compounded at a daily rate, and is charged for the life of the unpaid tax debt until it’s paid. It’s the short-term rate, plus three percent. But the IRS penalties can be a bit burdensome. That’s a whole other ball game altogether.
The good news is that the IRS may abate certain penalties, interest, and fees. It’s discretionary (and up to the particular agent working your tax debt case), but it is possible.
Abatement of IRS penalties may be possible in instances of unavoidable absences, business records having been destroyed, or a taxpayer’s death or serious sickness.
To start, fill out and submit IRS Form 843 Claim for Refund and Request for Abatement. You’ll have to fill one out for each tax year, and if the IRS finds that there is reasonable cause, you may qualify for the penalties to be abated. If you owe tax debt to the IRS and didn’t file on time, the penalty will hit you for the failure to pay and for the failure to file a return.
That combined penalty runs at five percent of the unpaid tax debt. It’s the sum of the half-percent penalty for the late payment, and the 4.5 percent penalty for not filing. It’s added each month.
For tax scofflaws, letting the tax run unpaid for five months will have the total penalty cap out at 25 percent, but the late payment penalty will keep running. That’s not a good position to be in, which shows that paying off back tax debt to the IRS is a smart move.
If you filed but didn’t pay your taxes on time, there will be penalty punishing the taxpayer. Imposed on a monthly basis, it’s a half-percent of the unpaid tax. If your tax debt with the IRS is sizable and goes for several months, then the corresponding IRS penalties can also be a financial thorn in your side. To make matters worse, that half-percent penalty rate can grow to a full one percent if the debt remains unpaid after the IRS sends you several notices and issues an notice of intent to levy.
The penalty rate can be reduced to a quarter-percent per month if the tax return was filed on time and the tax is paid through an installment agreement.
While there may be a soft spot in an IRS’s agent for removing your penalties, the key is to not wind up in a messy tax situation in the first place. By working with a tax professional, you can put the kibosh on IRS tax debt before it starts.
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