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Penalty Relief Due to Reasonable Cause

Many individuals find themselves with two related problems: (i) they’ve made a mistake on their tax returns and owe the IRS a large sum of money in back taxes and penalties; and (ii) they don’t have the funds to pay this debt.

The good news is that you may qualify for relief from penalties if you made an effort to comply with the requirements of the law, but were unable to meet your tax obligations because of circumstances beyond your control — due to “reasonable cause.”

Taxpayers who fail to meet their tax obligations may owe a penalty. The IRS will impose a tax penalty for various reasons, this includes if you fail to:

  • File a tax return on time;
  • Complete an accurate federal income tax return;
  • Correctly pay any tax owed on time; and
  • Give accurate information returns.

It’s important to note that the IRS may charge interest on the underlying tax liability, and interest on the assessed penalties if you fail to pay what you owe in full. Moreover, the IRS will charge some penalties monthly until you pay the full amount that you owe.

What is “Reasonable Cause”?

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The government will consider any reason that demonstrates that a taxpayer used “all ordinary business care and prudence” to meet his or her federal tax obligations but was nevertheless unable to do so.

The IRS will provide penalty relief due to reasonable cause. The IRS says that reasonable cause is based on all the facts and circumstances in your situation. The government will consider any reason that demonstrates that a taxpayer used “all ordinary business care and prudence” to meet his or her federal tax obligations but was nevertheless unable to do so.

What Are Some Typical Situations When Relief is Granted?

The IRS will consider any sound reason for failing to file a tax return, make a deposit, or pay tax when due. If established, these reasons include:

  • Fire, casualty, natural disaster, or other disturbances;
  • The inability to obtain financial records;
  • Death, serious illness, incapacitation, or an unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family; and
  • Other reason that demonstrates the taxpayer used ordinary business care and prudence to meet his or her federal tax obligations but were nevertheless unable to do so.
  • First time penalty assessment is given consideration in penalty abatement/waiver relief.

Is a Lack of Funds Sufficient to Show “Reasonable Cause”?

No, the IRS says that a lack of funds—by itself—isn’t reasonable cause for failure to file or pay on time.

However, the reasons for a taxpayer’s lack of funds may satisfy the reasonable cause criteria for the failure-to-pay penalty.

What Penalties Does the IRS Impose?

There are a number of penalties for which the IRS send notices and letters. These include the following:

  • Information Return. This applies to taxpayers who fail to file or to correctly provide required information on a tax return or payee statement by the due date;
  • Failure to File. This penalty applies when a taxpayer fails to file a tax return by the due date;
  • Failure to Pay. This applies when a taxpayer does not pay the tax owed by the due date;
  • Accuracy-Related. This penalty is imposed when a taxpayer does not claim all of his or her income, or when a taxpayer claims inapplicable deductions or credits;
  • Failure to Deposit. This penalty is meted out when a taxpayer does not pay employment taxes accurately or on time;
  • Tax Return Preparer Misconduct. There is a penalty for misconduct by tax return preparers;
  • Dishonored Checks. The IRS will impose a penalty if a taxpayer’s bank fails to honor his or her check or other form of payment, unless said failure is due to bank error;
  • Underpayment of Estimated Tax by Corporations. This applies when an entity fails to pay estimated tax accurately or on time; and
  • Underpayment of Estimated Tax by Individuals. This penalty is imposed when an individual taxpayer does not pay estimated tax accurately or on time.

Again, the IRS charges interest on the underlying tax liability, and on the assessed penalties, and the date from which the agency starts to charge interest is based on the type of penalty.

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Lack of funds—by itself—isn’t reasonable cause for failure to file or pay on time, but the reasons for a taxpayer’s lack of funds may satisfy the reasonable cause criteria.

Interest will accrue and increase the amount owed until the taxpayer pays the balance (plus all accumulated interest and penalties) in full.

How Do I Apply For Penalty Abatement Waiver?

A taxpayer is required to file an IRS Form 843 to request a penalty abatement/waiver. In the Form 843, the taxpayer must state the source of the penalties assessed. The taxpayer must also calculate the amount to be abated or refunded (if already paid), and an explanation why he or she thinks that their abatement/refund claim should be allowed.

Interest charges cannot be abated except in the case of an IRS ministerial error, or as part of a special tax appeal procedure called an Offer in Compromise. However, to the extent that penalties are successfully reduced on application for abatement, the interest charged thereon will be correspondingly reduced.

Can I Write my own IRS Penalty Abatement Letter?

Yes, there are sample letters available to ask the IRS for penalty abatement. However, a taxpayer’s chance of his or her request being accepted is greatly improved when working with an experienced New York tax penalty abatement attorney.

Contact an Experienced New York Tax Penalty Abatement Attorney

Ely J. Rosenzveig practices in the field of tax advocacy, and he has extensive experience in successfully navigating penalty abatement issues, large and small, with both the IRS and the New York State Department of Taxation and Finance. The law firm of Ely J. Rosenzveig & Associates, P.C. proudly assists taxpayers in White Plains, NY, Westchester County, New York City, its 5 boroughs, and the tri-state area.

Ely Rosenzveig
[email protected]

Ely J. Rosenzveig practices principally in the fields of elder law, trusts & estates, tax planning, employment law, and mediation. He has extensive experience in federal and New York State tax law, and has successfully represented a wide range of clients on FBAR & FATCA compliance issues. Ely also practices employment law, with a particular emphasis on age and disability discrimination, negotiating compensation agreements, and severance issues.

With his extensive background in the law, his experience as a congregational rabbi, and his specialized training in Mediation at Harvard Law School, Ely is also available as a professional mediator to help facilitate optimal solutions in matters ranging from family and estate disputes to multi-party commercial issues.



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