An Overview of the IRS Tax Collections Process for Non-Tax Lawyers
29. Interest and Penalty Abatements
Interest and penalty abatements. One of the more commonly complaints that we get around our office is the amount of interest and penalties that are tapped on to liabilities. A taxpayer will call us up and say, “Hey, we owe $20,000 to the IRS but they charged another $20,000 in interest and penalties that we didn’t even know them. Is there anything that we can do about the interest and penalties?”
The short answer is “yes,” particularly with respect to the penalties.
IRS interest abatements are very difficult to get. The IRS fears interest as what they are entitled to because of a delinquent tax liability. The IRS interest rate usually is pretty low. It’s usually defined by the statutory interest rate. It’s usually between a 3% and 6%. So, it’s usually not that big of a killer.
The killer is the penalty portion of it. The penalties are often substantial. They can raise anywhere from 10% to 75% and they can turn a small liability into a fairly substantial one really, really quickly.
Penalty abatements are governed through Section 20 of the Internal Revenue Manual. It is that particular part of the manual dictates on the “reasonable cause.” Reasonable cause is the circumstances that led to the reason that the taxpayer was penalized.
For example, if the taxpayer experiences a sudden illness or a taxpayer’s home burns down in a fire, or the taxpayer relies on the guidance of a professional or the IRS, and it is considered reasonable. There are also grounds to challenge a penalty.
In reality there are a variety of circumstances that exist in an individual’s life. By listening to that person and by letting them tell their story, even if that story does not seem like it could be ground for a reasonable cause, often there is a story behind it that could potentially give yourself an avenue to relieve penalties.
So those grounds are really important. I would recommend on boarding a tax professional to deal with penalty issue because of the technical nature of it. But I do want to point out that penalties can be fairly, quickly and easily dealt with if addressed appropriately.
One of the easiest ways to address penalties particularly smaller penalties is through the first time abatement program.
The IRS has a program set-up where you can abate penalties of a certain level fairly quickly and sometimes over the phone through an automated method.
The IRS will go through a series of questions with the taxpayer representative. If they find a reasonable cause, and they will automatically abate penalty on the spot. This is a great advance in penalty abatement and makes things much, much quicker.
However, it is limited to penalties of a certain dollar amount. Usually, it’s $4,000 or $5,000. Anything over $5,000 you’re going to want to administer a Form 843 or a form or request for penalty abatement and that will get that process started as well.
Penalty abatements go through the Penalty Appeals Service Coordinator. There are a couple of occasions for those. In California we deal with the one out in Utah. If the IRS decides not to abate the penalty where they find that your reasonable cause is lacking, you do have the option of taking penalty abatements into appeals.
Oftentimes, if the Penalty Appeals Service Coordinator denies your penalty on the outset, the mere threat of going to appeals will cause and will take another look at your penalty and see if they can dispose of that.
Have this happen multiple times so don’t be discouraged when they first deny your penalty.