What is penalty abatement?
Penalty abatement is an IRS process that helps you reduce the amount you owe by proving that you had “reasonable cause” for not paying IRS tax debt or not filing at all. If you can prove reasonable cause, the IRS may reduce or remove some or all of the penalties and interest applied to your debt.
IRS penalty abatement reasonable cause criteria
The following life events provide reasonable cause for not filing or not paying taxes when they’re due, according to the IRS:
- Fire or natural disaster
- An inability to obtain the appropriate records
- Death, serious illness or incapacitation of the taxpayer or an immediate family member
Simply lacking funds or income, does not serve as a reasonable cause, specifically for not filing. However, if there was a root cause of the lack of funds that you can link to one of the above criteria, then lack of funds make count as a reasonable cause for nonpayment.
How does penalty abatement work?
- When you apply for penalty abatement, the IRS will require documentation showing reasonable cause
- You can provide hospital or court records, letters from physicians, and documentation on natural disasters, as applied, to prove reasonable cause.
- Once approved, the IRS will remove some or all of the penalties applied to your debt. There is no interest abatement; however interest charged on a penalty will also be reduced or removed along with the penalty it applied to.
Understanding IRS penalties and interest
Each month, the IRS charges a penalty that’s equal to a set percentage of the total unpaid tax debt you owe. At minimum, the penalty is equal to 0.5% of the total debt owed. However, the IRS may apply additional penalties up to a maximum of 25% of the total amount owed. If you have not filed, this equates to an additional 5% penalty on what you owe.
A monthly penalty may be applied, regardless of your enrollment in an installment agreement. The penalty will be calculated based on how much you owe at the end of each month. This is why it’s in your best interest to pay off tax debt as quickly as possible.
Tax extensions don’t stop tax penalties!
Penalties and interest are applied if the tax debt is not paid by the filing deadline. Even if you file an extension, if you do not pay what you owe by April 15 then the total amount of debt you owe will increase every month it remains unpaid!
It’s also important to note that even Currently Not Collectible (CNC) status will not stop or suspend penalties. If you owe the IRS, your debt is growing with each month that passes. It’s critical to talk to a tax debt resolution service immediately to make a plan to repay what you owe!