Even if you’ve filed your taxes in good faith, unfortunate circumstances may leave you with an unexpected IRS tax penalty for falling behind on your filing or paying your taxes.
If you’re unable to pay your tax debt, then you know just how quickly those penalties and interest charges can add up. It can lead you straight into a debt cycle that feels impossible to get out of.
You’re not alone. The IRS issues about 40 million penalties to taxpayers each year, according to the Taxpayer Advocacy Panel’s 2020 report. There are 150 different types of IRS penalties, but the most common ones are failure to file a return on time, failure to pay after filing, and failure to pay the estimated amount owed from the past year.
However, some options, including IRS one-time forgiveness, can reduce or remove your penalties, depending on your situation.
Regardless of how you incurred the tax debt, it’s important to take action now and make sure you’re not in the same situation again next tax season.
Does the IRS offer tax debt forgiveness?
If you’ve been diligent with your taxes for years but made an error by missing the filing deadline or payment due date, the IRS may consider your request for penalty prevention and penalty relief. The IRS also offers several other methods to help small business owners pay down and eventually eliminate their outstanding balance through its Fresh Start program.
However, the criteria for qualifying are strict, and not everyone who asks for tax debt forgiveness from the IRS will get it.
Learn more: 10 Red Flags That Trigger an IRS Audit
What is one-time forgiveness?
One-time forgiveness, otherwise known as penalty abatement, is an IRS program that waives any penalties facing taxpayers who have made an error in filing an income tax return or paying on time. This program isn’t for you if you’re notoriously late on filing taxes or have multiple unresolved penalties.
There are three ways you can seek one-time forgiveness:
1. First-time penalty abatement
This is the main form of relief the IRS offers to taxpayers (both individuals and business owners) to cover first-time penalties. It’s also your chance to show a logical and justifiable reason for not filing or paying on time.
Only 12% of the penalties for failure to file and failure to pay were abated in 2019. Why is the number of abatements so low? It appears that many taxpayers who would otherwise qualify for relief aren’t aware this program is available.
The penalty abatement program can reduce or remove a penalty—though not your tax liability —if you meet all of these criteria:
- You’ve filed all of your tax returns
- You’ve paid your outstanding balance or made an installment arrangement with the IRS
- You have no prior penalties in the past three years
If you have the financial resources, it’s a good idea to pay your debt before you apply for relief, as the failure-to-pay penalty will continue to increase until the tax is paid in full.
2. Reasonable cause
If you’re not eligible for first-time penalty abatement, you may request the IRS to waive your fees under reasonable cause.
Examples of reasonable cause might include:
- Fire, casualty, or natural disaster
- Unable to obtain records
- Death, serious illness, incapacitation, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
- You used all ordinary business care and judgment to meet your federal tax responsibilities but were still unable to do it
A lack of funds alone isn’t enough to qualify for relief. It’s important that you have documents to support your claim (with exact start and end dates), like hospital records, court records, or a letter from your doctor that confirms you were ill or incapacitated.
For example, if a family member’s death kept you from filing on time, you’ll need to present a copy of the death certificate to support your claim.
Or, if a fire destroyed your business and your business’s financial records, delaying your ability to file, you would need to show the date of the fire and any subsequent events and dates related to your situation. This would also require a copy of a report from the fire department or police, along with copies of letters or emails you sent to authorities requesting copies of your tax documents.
Regardless of the case, it’s always a good idea to keep records from the IRS and any institutions or authorities together with all your financial records.
3. Statutory exception
You may ask for statutory exception if you received incorrect written advice from the IRS. To do this, you’ll need to file a Form 843, Claim for Refund and Request for Abatement for penalty relief. Your form should include your request for advice, the mistaken written advice you followed, and the amount of taxes and penalties you incurred related to the IRS advice.
Again, be sure you have all the relevant documents to support your claim, and retain every piece of correspondence you get from the IRS.
How do you apply for one-time forgiveness?
While you can navigate this process on your own, it’s best to talk to a tax professional before applying for abatement to increase your chances of success.
Tax professionals (like a tax attorney, enrolled agent, CPA, or tax resolution firm) often have experience with successful penalty abatement requests and can discuss your eligibility for tax debt relief. They can also gather all necessary information, fill out the required forms, and communicate with the IRS on your behalf.
Here are three ways to request penalty abatement from the IRS:
Written petition: Write a letter stating why the IRS should erase your penalties. Attach documents that will prove your case. Send the letter to the address provided on the notice of tax amount due the IRS sent you.
IRS Form 843 (Claim for Refund and Request for Abatement): You or your tax practitioner will need to fill out this official form for an abatement request. Here, you’ll need to give personal information, like address and SSN, along with details about your specific penalty and why you’re applying for abatement. You can include your written petition along with this form.
Verbally: Sometimes, it’s just easier to request penalty abatement over the phone with an IRS representative or in-person at your local Taxpayer Assistance Center. They may ask you to submit your documents that support your claim.
What about interest?
Even if a penalty is forgiven, interest may not be. Some penalties may increase monthly and accrue interest, and your debt may grow from hundreds to thousands of dollars.
Typically, the IRS starts charging interest on the day the penalty is due and will continue until your account is fully paid. That’s why it’s better to address any complications resulting from a tax return before more interest piles up.
Are there any other tax relief options available?
If you don’t qualify for one-time forgiveness, don’t give up trying. The IRS offers other ways to help you pay down and eventually settle your tax bill through its Fresh Start program.
The Fresh Start program is an umbrella term for the many options the IRS offers for tax debt relief. Taxpayers and small business owners benefit from this program because they can ease your tax burden through affordable payment agreements while dodging more severe consequences like tax liens, levies, or jail time.
There are four main forgiveness programs accessible to taxpayers:
Installment agreement — The most common repayment period is 72 months. The IRS recommends this if you can’t pay your tax debt in full, including penalties and interest.
Offer in compromise (OIC) — You offer to pay the IRS a fraction of what you owe. An offer in compromise may be an option if you can prove to the IRS that paying your tax debt in full would cause financial hardship.
Currently not-collectible status — This will give you a one- to two-year delay in any IRS collection activities on your tax liability if you can prove that you’re currently unable to pay your debt, either in an installment agreement or full.
Penalty abatement — Tax leeway if you’re faced with a unique tax situation that has limited your capacity to pay.
How Bench can help
When you fall behind on your bookkeeping, it can be even easier to fall behind on your taxes.
That’s where Bench comes in. Our team of specialized historical bookkeepers can get your books up-to-date and resolve any outstanding bookkeeping issues, helping you find deductions that can even lower your total tax debt.
Your Bench bookkeeper generates the accurate financial records you need to start your resolution with the IRS, and as a Bench client, you’ll have access to our network of vetted tax resolution partners that can help you navigate negotiating your balance or setting up a monthly payment plan.
Whatever your financial situation, Bench can help you decide which tax relief option is best for you. Learn more about historical bookkeeping with Bench Retro.
Get in the good books with the IRS
When you’re running your own business, you’ve got enough on your plate without worrying about back taxes. If you get a penalty notice from the IRS, don’t panic as you may be eligible for one-time forgiveness or other tax forgiveness and relief programs. Getting your tax debt under control and properly managing your records during the year can help your business run efficiently and make tax time easier.