When it comes to fixing their IRS problem, one of the most common things people want is an abatement of their penalties and interest.
I want to start with two precautions worth pointing out.
First of all, note that there are no provisions within the law for the removal of interest charges unless they were accrued because you got bad advice from an IRS employee, which is extremely rare and extremely difficult to prove (write down everything when you talk to the IRS, by the way!). If a salesperson at a tax resolution firm is telling you that they can get interest charges abated, run away very quickly, because you're talking to somebody that is either outright lying to you or is an idiot.
Second, note that penalty abatements are not automatic. If you are being guaranteed by a company that they can get a certain amount of your penalties removed, you're also being lied to. Again, there is NO GUARANTEE that the IRS will EVER grant a penalty abatement.
With those two points in mind, let's consider your penalty abatement application. In order to get penalties abated, you have to demonstrate two significant things:
1). Despite exercising "ordinary business care and prudence", you were still unable to meet your tax obligations.
2). Your reason for not being able to pay your taxes on time falls under one of the IRS "reasonable cause criteria".
When submitting a penalty abatement application, since there is no form, you're basically just writing a letter. This letter needs to address both of the items above. It's basically an explanation, with timelines, people involved, and any and all documentation available to prove your case. In reality, it's not just a carefully crafted letter -- it's an entire package of "stuff".
The demonstration of "ordinary business care and prudence" is very important. In short, you have to demonstrate that you did everything in your power to get the taxes paid, but due to circumstances entirely beyond your control, it simply wasn't possible. The thing to keep in mind regarding this standard is that the people reviewing your application at the IRS have most likely never operated a business in their entire lives. In fact, most of them are lifelong civil servants, and have little, if any, actual grounding in what "ordinary business care and prudence" entails in the real world. Therefore, your explanation must be written in very simplistic, easy to understand terms, and actually outright explain what is customary for your type of business or a family in your area.
For example, if you are applying for an abatement of penalties for failure to pay personal income tax, you must explain that the average family of four, just like yours, in your hometown lives in certain size and value of homes and drives certain types and values of cars, and that your lifestyle is therefore "ordinary and prudent" for your area and income, rather than lavish in comparison.
Just for the record, this does not mean that higher income individuals that live more lavish lifestyles can't get penalty abatements, but it is definitely far more difficult, and something you should seek professional assistance with, rather than trying to do on your own.
Now what about these "reasonable cause criteria"? Basically, the IRS requires you to have been involved in some unordinary circumstance in order to get an abatement of penalties. Here are some questions to consider that center around reasonable cause criteria:
Were any business records lost or destroyed?
Were there any circumstances that led to a substantial drop in collecting on accounts receivable (or wages)?
Was there any transition in the business that lead to the failure to pay taxes?
Was there a death or serious illness that directly affected the business or personal wages?
Was there any embezzlement of funds, theft of valuable property, or identity theft?
Were there any alcohol or drug abuse issues that affected the business or wage earning capability?
Was there a natural disaster that impacted you or your business?
Did you rely on the advice of a CPA or IRS employee in making tax decisions?
Were there any circumstances that created substantial financial hardship, to the point where you or your business was close to going bankrupt?
If your circumstances fall into one of these questions, then you may meet reasonable cause criteria. Explaining your circumstances to the IRS in your letter that demonstrates reasonable cause then becomes the final part of applying for your penalty abatement.
Jassen Bowman is an IRS-licensed Enrolled Agent, and assists small businesses and individuals with resolving IRS tax debts. If you are looking to apply for a penalty abatement, get your FREE copy of Jassen's powerful IRS penalty abatement sample letter.
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