Guide: IRS Penalties and Interest Abatements

Guide: IRS Penalties and Interest Abatements

If you fail to pay your tax liability when it is due, the IRS will assess penalties and interest.

W-2 Wage Earners

Most taxpayers are W-2 wage earners never have to worry about the assessment of interest and penalties. This is because they have withholding taken out of their paycheck. Often, the withholding amount on their paycheck is adequate or they have more withholding than what is required, and they will receive a refund.

Self Employed and those that receive a 1099

If you are self-employed or receive a 1099, and do not pay your tax liability when due, the IRS will assess penalties and interest on the unpaid balance. Self-employed and those receiving a 1099 are required to make quarterly estimated tax payments throughout the tax year in which they are earning income. So, even if you full pay the tax liability when you file your tax return, you may still be subject to a penalty and interest assessment for not making quarterly estimated tax payments.

Will the IRS abate the penalties and interest?

This is a common question. Many tax resolution companies tout that they will abate the interest and penalties. However, beware because this is often times a marketing ploy by uniformed commissioned sales people trying to get your business. Other than the first time penalty abatement which many may qualify for one tax year, there are only a few unique circumstances which you allow for a penalty abatement. A taxpayer who can show ‘Reasonable Cause’ may have grounds for a penalty abatement.

What is Reasonable Cause?

Reasonable Cause is what the Ordinary Reasonable Prudent Person (ORPP) says Reasonable Cause is. Unfortunately, it is not always something you can determine from an objective standard but can be more subjective. Certainly fire, casualty loss and other natural disasters play a factor in seeking a penalty abatement. If you were in the fire zone of the California fires recently, for example, and your home and business was destroyed, that may be grounds for abatement.

If you unexpectedly suffered the death of a young child, you may have grounds for a penalty abatement. Just remember that the incident must have disproportionally affected YOU. A downturn in business based upon the economy is not grounds for a penalty abatement. If you qualify for a penalty abatement, it would only cover the year in which you were affected.

What about interest abatement?

If you qualify for a penalty abatement, you would also receive an interest abatement based upon the proportional amount of the penalty abated. In other words, if the IRS abates $5,000 in penalties, the interest on the $5,000 would also be abated. You would not receive an interest abatement on the outstanding tax due. Keep in mind, like a bank loan, as long as there is a balance, the IRS will charge interest.


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