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The IRS assesses billions in tax penalties each year, but few people know the agency is sometimes willing to change its mind and reverse certain tax penalties.
Two tax pros offer some insights into how the IRS’s penalty-abatement program works and how you may be able to get out of a tax penalty — or even get a refund for one you already paid.
Qualifying for first-time penalty abatement
You have to be current on filing your tax returns (it’s OK to have a tax extension).
You have to be current on your tax bill or at least have a payment arrangement in place with the IRS.
You must have a clean record: no penalties for the three tax years before the tax year in which you received a penalty.
“Basically, if you have been in compliance, and you filed on time and you haven't had any penalties in a three-year period, you're allowed to make a mistake,” says John Lyons, a certified public accountant at accounting firm Gorfine Schiller Gardyn in Maryland.
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How to apply for penalty abatement
You can ask for first-time penalty abatement by calling or writing to the IRS, Lyons says. If you go the phone route, you might get an answer right away, but be sure to get the agent’s name and number and then follow up with a written letter, he notes. If you've already received an official IRS notice about your penalty, there will likely be a number on the upper right-hand side of the letter that you can call.
And don’t worry about haggling. “It's not a negotiation; it's all or nothing. You either qualify or you don't qualify,” says Jim Buttonow, a certified public accountant in Summerfield, North Carolina.
The IRS may have also tacked interest on to your balance, Buttonow warns. “However, if there's interest that accrues from the failure-to-pay penalty or the failure-to-file penalty that's owed, the associated interest will get abated also,” he says.
Fill out IRS Form 843
If you've already paid a penalty and now realize you might be able to get your money back, you’ll want to file IRS Form 843. There, you’ll tell the IRS which penalty you want refunded and why. Typically the IRS allows people to go back two or three years, depending on the circumstances, but sometimes it can be longer.
If the IRS denies your request for first-time penalty abatement but you still think you qualify, you can appeal the decision. You typically have to file the appeal within 30 days of the IRS' rejection. Publication 4576 has more information about the appeals process.
See if you qualify for other types of penalty relief
If it turns out that you don’t qualify for first-time penalty abatement, you might want to ask for penalty relief “due to reasonable cause,” Lyons notes. Keep in mind, however, that if you incurred a tax penalty simply because you didn’t know the rules or made a mistake, that route probably isn’t for you.
Penalty relief due to reasonable cause is typically only viable for people who have experienced deaths in the family, house fires, medical trauma, natural disasters or other dire situations. You’ll need to provide documentation such as hospital records, court statements or other evidence that supports your claim.
Know when to get help
You’re not required to hire someone to request a first-time penalty abatement for you. If you’re not sure whether you’ve paid any penalties or don’t know how much you owe, you don’t have to pay someone to get that either: You can get your account information from the IRS for free by requesting a tax transcript. But it’s OK to get help from a tax pro. “Unless you speak IRS, it's really difficult to understand this,” Buttonow says.
Either way, challenging a first-time penalty could have its own rewards. “It always is worth pursuing,” he says. “If you don't ask for it, you don't get it.”