Penalty Abatement -- Not So Easy

Along with death and taxes, nothing is more certain in this world than the penalties you will pay the IRS if you fail to file your tax returns or fail to pay an assessed tax. Failing to file a return and pay the amount owed can, given time, spiral to 45 percent of the tax owed. Clearly, failing to file and pay can have severe consequences. The IRS expects you to file and pay on time.

But is there any relief if you fail to file or can't pay at the time tax is assessed?

The IRS does provide for penalty abatement, but be forewarned. Contrary to popular opinion, the IRS won't remove failure to file or failure to pay penalties out of professional courtesy. If you want to have penalties removed, be prepared to make substantial arguments.

The IRS will waive penalties only if the tax payer can make substantive arguments based on reasonable cause. "I forgot," "I don't have the money to pay," "I had to send my kid to college" are all common excuses, but none of them meet the reasonable cause basis of penalty abatement. More acceptable are claims of illness or deaths in the close family, major accounting errors in spite of all due diligence, and bad advice from a tax professional.

Even if you think you qualify for penalty abatement, be prepared to document your arguments. Without documentation, the IRS is likely to disallow your penalty abatement (forcing you to appeal). And be prepared for a long fight. Current IRS statistics showing a growing trend to deny abatement requests. The use of a tax professional is definitely advised.