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Successfully requesting civil tax penalties relief

In fiscal 2016, the IRS assessed 39.6 million penalties that totaled more than $27 billion. Many taxpayers who are assessed a penalty do not realize that they can challenge these.

That same year, the Service reduced about five million of those penalties for a total $9 billion of penalties discharged. And many people who may have qualified for relief may not have asked.

Penalties ensure tax compliance

Most penalties are assessed against individual taxpayers. Late filing, estimated-tax issues and late payment penalties make up the bulk of the assessments.

Designed for tax compliance added complexity of new tax laws and the increasing number of penalty categories have led to discussion about how, when and why they are imposed. Nina Olson, the IRS National Taxpayer Advocate, has drawn more attention to this issue.

If you were late filing your tax return or making estimated tax payments, “reasonable cause” might be one way to avoid a penalty. In our last post, we discussed some of the things that might qualify, such as fire or a serious illness. Some penalties may also be discharged in bankruptcy or negotiated through a partial payment.

First-time penalty abatement

Another possible avenue for relief is first-time penalty abatement, which requires that:

  • You were assessed no penalties in the preceding three years
  • You have filed all required tax returns
  • You have paid all taxes due or arranged a payment plan with the Service.

This form of relief can also reduce the amount of interest owed on back taxes. While this category of relief is described as “first-time,” it has a three-year look back and can be used more than once.

Responding right away after the IRS assesses a penalty is another sound tip for improving the odds of obtaining relief from the Service.

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