Reasonable Cause for Penalty Abatement
The IRS takes penalty abatement requests on a case-by-case basis. If you are not applying for first-time penalty abatement, generally you need a good reason(s) why you paid or filed late. This is called reasonable cause, and it's the most common reason for penalty abatement. It is important to understand that failure to file, failure to pay, failure to deposit, negligence, and the accuracy-related penalty can be abated.
To qualify for reasonable cause, you basically have to convince the IRS that you had a legitimate reason for not paying or filing on time. You also have to prove that you were exercising ordinary care and prudence.
What Is Reasonable Cause?
Reasonable cause is any legitimate excuse for not paying or filing on time. The issue must be out of your control. Also, you must prove to the IRS that you tried to file but that it was basically impossible.
Here are some common examples of reasonable cause:
- Death of a family member or someone very close to you.
- Unavoidable absence such as being in rehab or jail.
- Held hostage in another country.
- Destruction of your records due to fires, floods, or other casualties.
- Could not make payment or deposit due to civil disturbance such as a mail strike or a riot.
- Unable to determine the amount of tax for reasons beyond your control.
- Received incorrect advice from a tax professional who is considered competent and trustworthy.
Additional Information to Prove Reasonable Cause
If your situation is not listed above, the IRS will look deeper into your case. Here are some of the questions IRS agents may ask. These questions help determine if you should receive penalty abatement.
- What were the circumstances of the situation that caused your problem? Furthermore, why did these circumstances keep you from complying with tax laws?
- Do you have a history of paying late? If you have a history of being delinquent, your chances of abatement go down dramatically.
- How were other financial problems handling during this time? The IRS wants to know if the tax bill was the only one ignored or if other bills were ignored as well.
- Do the dates of the issue match the time of the tax due date or filing deadlines?
- Was the situation anticipated?
- Were the circumstances outside of your control? Did you have any control over the situation?
- How strong is your support? Do you have third-party documents? Doctors’ notices? Hospital bills? News of abduction?
The requirements for penalty abatement are more open than almost all other types of tax resolutions. The IRS puts an actual face on your case instead of a computer, and penalty abatement can be much easier to attain than other types of settlements.
As a general rule of thumb, the most important issue is whether or not the situation was out of your control. For best results, you should work with a tax relief professional who specializes in helping people with penalty abatement.
How to Apply for Penalty Abatement Due to Reasonable Cause
You can apply for penalty abatement due to reasonable cause over the phone or in writing, and the IRS allows you to submit a letter or use Form 843. Although calling the IRS can be very effective when you're applying for first-time penalty abatement, it does not work as well with reasonable cause.
To increase the chances of having your penalties waived, you should apply in writing using Form 843. This form outlines all the details the IRS wants to know, and it helps to ensure that you don't forget to include any critical information. In many cases, it is a good practice to provide additional documentation by attaching an explanation to Form 843.
Tips for Applying for Reasonable Cause
The IRS waives less than 10% of individual tax penalties every year, and the main reason for the low abatement rate is because taxpayers don't request penalty abatement. Additionally, most initial requests are automatically rejected by the IRS's computers, and most taxpayers don't appeal their denials (they should in many cases).
Simply applying and appealing can go a long way, but you should also keep these tips in mind if you want your request to be successful:
- Be detailed about your reason — When explaining why you couldn't pay or file your taxes on time, be very detailed about your reason.
- Explain how your cause affected the rest of your life — The IRS doesn't want to be the only entity that was ignored, and the agency is more likely to remove your penalties if you explain how your situation affected the rest of your life. For example, if you didn't pay your taxes due to an illness, you should also explain how that illness prevented you from going to work, pursuing your hobbies, or paying other bills.
- Provide evidence — Make sure you back up your claims with evidence. For instance, you may need to include medical records if an illness prevented you from paying your tax bill or insurance claims if a fire burnt your financial records and caused you to file late.
- Draft a timeline of the situation — Create a timeline of the situation that shows how it affected your ability to be compliant with tax regulations and why you are able to get back into compliance now.
- Show prior compliance — The IRS will be more likely to approve your request for reasonable cause if you were compliant with past filing and payment requirements. If you had a penalty in the past, be ready to explain why.
Aside from following these tips, make sure that you follow up on your application. The IRS's online system doesn't show the progress of penalty abatement requests, and the agency has a history of losing these requests. You may need to follow up by phone to ensure that your request is being processed.
Common Reasons for Reasonable Cause Rejections
Again, if you want to have your penalties abated, you need to convince the agency that a situation outside your control caused you to pay or file late, and a detailed application is critical to this process. However, it's important to note that the IRS usually rejects reasonable cause requests on failure-to-file penalties due to financial hardship and reliance on a tax pro.
The IRS's computer systems are programmed to automatically reject these two reasons for failure-to-file penalties. Even if you have additional reasons that you didn't file your return on time, the system will reject your request if it sees that you marked reliance on a tax pro.
Similarly, although financial hardship can be a successful angle when you're trying to get failure-to-pay penalties waived, the IRS doesn't see this as a valid reason for not filing your tax return on time. The agency offers several free filing options and filing assistance so that taxpayers can submit a return even if they are suffering from financial hardship.
Usually, financial hardship has an underlying cause, and if you couldn't file due to financial hardship, consider explaining the reason for the hardship. For instance, if you couldn't work due to being in jail, grieving a loved one, or being ill, you should highlight those reasons on your penalty abatement request instead of the financial hardship.
Why You Shouldn't Pay Penalties When Requesting Abatement
If you like, you can pay the penalties before you request abatement, and if your abatement request is successful, the IRS will send you a check. However, paying penalties before you request an abatement can work against you.
When you have an unpaid tax bill, the IRS allows you to request a Collection Due Process (CDP) hearing, and during this hearing, you can present your case directly to an IRS agent. If you pay off your tax bill and all your penalties, you lose this avenue.
The Reasonable Cause Review Process
If you request reasonable cause penalty abatement in writing, the IRS will usually take two to three months to make an initial decision, and if you appeal the agency's decision, the process can take six to 12 months.
Make sure that you apply in a timely fashion — you only have three years from the date the return was filed or two years after the penalty was paid to request abatement.
Get Help Applying for Penalty Abatement
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