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IRS Penalty Abatement and Interest Abatement

A common complaint I receive from many of my clients is that their IRS liability has increased substantially due to the penalties and interest that have been tacked on to the account (most of these clients are considering submitting an IRS penalty abatement). Indeed, even though the federal statutory interest rates are fairly low, interest and penalties that accumulate over time will add a substantial amount to a taxpayer’s overall liability. From a policy perspective, the IRS uses these additional fees to encourage taxpayers to pay off their liabilities sooner and also to help offset the administrative costs of trying to collect the liability. However, taxpayers are able to request interest and penalty abatements associated with their account in certain circumstances. I would often recommend that if a taxpayer meets one of the criteria below that they strongly consider an interest or penalty abatement. They can also request IRS reconsideration in certain circumstances.

To summarize, here are formal grounds for interest abatements[1] (IRM 20.2.7):

  • Excessive, barred by statute, erroneously or illegally assessed [ IRC 6404(a)];
  • Attributed to certain unreasonable errors or unreasonable delays by the IRS [ IRC 6404(e)(1)];
  • Assessed on an erroneous refund [ IRC 6404(e)(2) ];
  • Due on an additional liability that was not identified by the IRS in a timely manner [ IRC 6404(g)];
  • Disregarded for a period of time due to a taxpayer’s participation in a combat zone [ IRC 7508];
  • Disregarded for a taxpayer qualifying for Military Deferment [Title 50 Appendix section 570 USC]; and
  • Due on an account for a taxpayer located in a declared disaster area [ IRC 7508A].[2]

And here is an addition short list of the reasonable cause exemptions for penalty abatements:

  • Ordinary business care and prudence
  • Death, Serious Illness, or Unavoidable Absence
  • Fire, Casualty, Natural Disaster, or Other Disturbance
  • Unable to Obtain Records
  • Mistake was Made
  • Erroneous Advice or Reliance
  • Ignorance of the Law
  • Forgetfulness

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[1] Here is some more information regarding IRS interest abatements.

[2] Taken from IRM 20.2.7: http://www.irs.gov/irm/part20/irm_20-002-007r.html.