Dec 1, 2007

IRS Debt - Penalty Abatement - will it be successful?

File a tax return late and owe tax- you could owe a lot more than you think. The penalties (failure to file and failure to pay) along with the interest accruing (currently at 8%) can be 35% or more if you file more than 8 months late. This can make a $10,000 liability- $13,500. Obviously, the manner to save most of this penalty is to file on time (the penalty is 4.5% per month up to 5 months).

However, anxiety of owing causes a lot of people not to file. Hence , they compound their misery. Most believe that the IRS routinely abates penalties if you just ask- the answer to that is the IRS does not often abate penalties.

You must have rationale for penalty abatement - “I forgot” - “I do not have the money” - “I did not know I needed to file” are usually not good answers. Documented, reasonable cause arguments must be made. Even with reasonable cause, the IRS usually summarily disallows penalty abatement and challenge you to take it to their Appeals Division.

The data is not in favor of penalty abatement. IRS Data on penalty abatement is complicated but gives some insight as to your chances of penalty abatement. Less than 13% are abated (in number of penalties) and less than 39% (as measured in dollars). However, the amounts “abated” appear to include penalties that are written-off due to the collection statute of limitations expiration. One item is true: paying the tax prior to requesting penalty abatement is almost an absolute must.

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