In some cases, the IRS will waive penalties for you if your first offender. Here’s how it works.
If you failed to file a tax return, pay on time or deposit taxes when due you may qualify for a first time penalty abatement. Additionally, the following things all must be true in your case:
You didn’t previously have to file a tax return or you have no penalties for the three years prior to the tax year in which you received a penalty.
You filed all currently required returns or filed an extension of time to file.
You have paid or have arranged to pay any tax due.
The first requirement, “you didn’t previously have to file a return or have no penalties for three years prior” often confuses people.
Typically, this abatement is used for businesses. You may have missed the filing date because you didn’t realize it was different than your personal individual return. Or you may have failed to pay required estimated tax or payroll tax deposits on time. These are the kinds of things for which you may receive a first time abatement. But what if you personally have had penalties in the past?
That doesn’t matter.
It doesn’t matter because in this particular case, we’re talking about a business return. So let’s say you have an S Corporation or an LLC that has elected to be taxed as an S Corporation. If the S Corporation has never had a penalty before or at least did not receive a penalty in the previous three years, then you would be an ideal candidate to ask for a penalty abatement.
The penalty abatements are not automatic. You need to ask and it is up to the IRS as to whether they grant the abatement. That said, they have granted these requests in all the years that I’ve been practicing. I’ve never had them deny a request as long as you are compliance with what they stated was necessary.
Because interest on the failure to file penalty continues to accrue until tax is paid in full, it is usually best to wait until you have paid the tax to request the penalty relief. Additionally, if there is more than one issue with your return, make sure those are corrected and before you make the abatement request. If there are multiple reasons for a penalty, such as failure to pay or failure to file a return, you want to make sure you have filed your return and/or paid the tax. If the penalty is still accumulating and you request too soon you’re leaving some money on the table. Get your return filed and you will then know how much the penalty would be if you don’t get the penalty abatement.
Make sure your tax preparer is well-versed with dealing with the IRS. While you can do this yourself, it’s almost always better to have third party involved every time you talk to a tax agency. If we can help, Contact Us.