Penalty and Interest Abatements

Have you been hit with IRS penalties and interest associated with an IRS balance due?

As you have most likely noted, penalties and interest can add a significant amount to the original principal balance. The IRS uses penalties and interest as a means of encouraging taxpayers to remain complaint with their tax obligations.

Unfortunately for many taxpayers, the Service tends to take the approach of issuing penalties and interest as the rule of thumb and often does not initially give much thought to the circumstances surrounding their issuance.

Interest and Penalty Abatements

However, taxpayers are able to request interest and penalty abatements associated with their account in certain circumstances, and I have personally experienced much success getting them accepted (saving my taxpayers thousands of dollars off their assessed liabilities)

Under Internal Revenue Code (IRC) §6404, “The [IRS] is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, [1] which is excessive in amount, or [2] is assessed after the expiration of the period of limitation properly applicable thereto, or [3] is erroneously or illegally assessed.”[1]

So, in plain English:

  • If the IRS has miscalculated the amount that should have been added to your liability
  • If they have gone past their allowable time to assess a tax liability
  • If they have made a mistake or otherwise done something wrong in their assessment…

…They can then go back and fix their mistake.

In addition, IRC §6404(e) allows them to abate interest in penalties in situations where IRS administrative delay (“a ministerial or managerial act”) has caused the assessment.

Three Circumstances for Abatement

In reality, penalties and interest are only usually abated in three circumstances.

The first is computational error by the IRS, which does happen frequently but is usually overlooked because of the difficulty in proving it. Because of the technical nature of challenging an IRS penalty or interest assessment on these grounds, I would personally recommend having a tax professional verify that everything has been calculated correctly based on the applicable statutory interest rates and IRC guidelines for penalty assessments.

Second, penalty abatements only can be mitigated based on reasonable cause. “Reasonable cause” by the IRS is based on factors outlined in the Internal Revenue Manual (IRM). For more information on what constitutes reasonable cause, please see my article here on its factors and on challenges based on reasonable cause.

Reasonable Cause

However, I have provided a brief summary of the reasonable cause factors below.

  • A taxpayer can only use reasonable cause to challenge penalty abatements. Per IRM 20.2.7, reasonable cause cannot be used to challenge interest abatements, only penalty abatements.
  • A taxpayer can also challenge an interest or penalty assessment based on delay caused by the Internal Revenue Service. To successfully mount a challenge in this manner, the taxpayer should be prepared to present evidence showing that any delay was caused by the IRS’s negligence and not the negligence of the taxpayer.

Before deciding whether to challenge an IRS penalty and/or interest assessment, we would encourage you to speak with our firm or another qualified tax attorney in order to assess you likelihood of success.

We have an excellent track record of getting penalty and interest abatements approved by the IRS and have authored numerous abatement requests.

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