How to Apply for IRS Penalty Abatement for Your Tax Debt

How to Apply for IRS Penalty Abatement for Your Tax Debt

Forget about asking the IRS to remove interest charges from your account. This will never happen. Standard and mandatory interest is a fact of your financial live, and it’s a waste of time to try and negotiate your way out of paying it. Penalties are a different matter entirely. If there is reasonable cause for it, the IRS will sometimes remove the same. A settlement, or an offer in compromise, is another different matter. Since no interest is charged if the IRS accepts an offer in compromise.

Penalty abatement (removing some of the penalties from your account) will only be considered by the IRS if there is reasonable cause. The question then, is how do we establish reasonable cause?

In order to establish reasonable cause we need to take three things into consideration:

  1. The type of penalties assessed on your account
  2. The amount of each of the penalties
  3. The type and amount that were charged for each tax year in question

You will be able to determine the type of penalties assessed on your account by again referring to the account transcripts.

The transcript will provide a line-by-line explanation for each year that you have a balance due with the IRS. The transcripts will list each penalty type for every year and the amount assessed.

Reasonable Cause

Reasonable cause is essentially your excuse (I paid my taxes late because/I filed my tax return late because).

  • Your excuse has to relate directly to the specific penalty you want to have removed.
  • Your excuse has to be
  • Your excuse has to be truthful.

The IRS accept certain excuses as reasonable:

  • You were out of the country and unable to file.
  • You had medical or financial hardship.
  • You received improper advice from a tax professional who advised you not to file/pay.

Reasonable cause is also informed by your compliance history. Using the excuse that you fell on financial hardship will be very reasonable if you have a stellar record of compliance, but if you have been non-compliant often, for many years, your hardship excuse will lose some of its glitter. If your cause (excuse) for not filing resulted in multiple years of non-compliance, or continuous non-compliance, it becomes much less reasonable. It is assumed that a truly reasonable person would have taken action at some point in time, to remove the obstacles out of his/her way.

When you request a penalty abatement, you have to use form 843, filled in separately for every penalty. So, if you have a late filing and failure to pre-pay penalty for tax year 2016 & 2017, then you will want to prepare four different 843 applications, one for each penalty for each year.

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How to plan for IRS tax relief

IRS Payment Plans

The Federal government has many different types and methods of monthly payment plans tailored to fit your personal situation measured by two factors.

IRS Streamlined Payment Plan

The Streamlined Payment Plan is a six year or 72-month plan. Take the total balance that is owed and divide it by 72, and that is the minimum amount the IRS will accept for this option.

If you owe the IRS even one cent under the $25,000 threshold, and you have satisfied the compliance requirements then you qualify for the Streamlined Payment Plan.

How do you set up this plan?

You can approach this in two ways. You can fill in form 9465, or you can just call the IRS and request it.

There is one advantage in mailing in the request to the IRS, and that is if you need to buy a little bit more time to financially prepare to make the payments. In that case, you can proceed with form 9465.

You are allowed to choose the monthly due date for your payment plan.

It must fall between the 1st and the 28th of the month. You have to take note thought, that the date you pick has to be the date the IRS receive the payment, not the date when you send it. If you need to send a check via mail, you have to mail it at least eight days in advance.

Fresh Start Payment Plan

This plan is available to you if you owe between $25,000 and $50,000 in Federal income tax debt. In many respects this plan has the same requirements as the previous one. You must have satisfied the compliance requirements, the minimum monthly payment has to be equal to the total amount outstanding divided by 72; the payment has to be made on the same day, between the 1st and the 28th of every month, according to your choice, and – the payment MUST be made by direct debit from your bank account.

How do you set up this plan?

To set up this plan you can call the IRS and submit form 433-D (direct debit form) or you can mail form 9465-FS.

The one benefit you obtain when you agree to this plan is that you can file form 12277 to request a lien withdrawal as soon as you have made three consecutive payments via direct debit. This is also possible if you follow the streamline payment plan, but only if you selected the direct debit payment option.

Automated Collections System (ACS) Payment Plan and Form 433-F

If you owe the IRS more than $50,000, or if the minimum payment calculated over the 72-month timeline is too much for you to afford, then your payment plan can be based on how much you can afford to pay monthly rather than on a time based plan.

Before you can qualify for the ACS payment plan, you are required to disclose your financial condition to the IRS. The precise extent of the required disclosure will depend on whether your account is in the Automated Collection System (ACS) or whether it is assigned to a local Revenue Officer (RO).

In the ACS no one is in charge of your account. You are assigned a number and the computer will automatically send out notices and take enforcement actions against you in accordance to the actions it is programmed to follow based on the IRS protocols and guidelines. In this case you are part of a national system and the disclosures you are required to make are limited to form 433-F.

If you are assigned a local RO, you will receive your notices from a local IRS officer and you will get a phone call from this officer or he/she will stop by at your last known address from time to time. The RO will require a more detailed financial disclosure from you, by way of form 433-A.

How do you setup this plan?

To start off, you will have to call the IRS and request a payment plan for your balance. You must always remember that you can only make this call once you are compliant. During this call you have to explain to the IRS that you will be forwarding a financial statement in order to set up a non-streamline plan.

The officer on the phone will ask you specific financial questions in order to determine how much you can afford to pay. In essence, the information the officer will request will mirror form 433-F verbatim. It helps if you prepare and fill out a 433-F form in detail prior to making the call.

The purpose of the form is to determine how much you can afford to pay per month. The more your income and the more valuable your assets are, the more you will be required to pay monthly. The more strained your financial condition appears after completion of the form, the lower your monthly payment will be.

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Human nature drives us to present ourselves in the most favorable light possible in order to show others you are doing well. This will not help you at all when you are dealing with the IRS. You have to put your ego aside here. While you have to stick to the truth when you deal with the IRS, the light most favorable to you is when your financial condition appear as bad as possible. While you cannot lie on the form, there are various sides to every story.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

If you are currently dealing with IRS debt, be sure to contact us and discuss which debt resolution option would be most beneficial for your present situation and future goals and opportunities.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me and follow us on Facebook : FAS CPA & Consultants.

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