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How to Know if Your Client is Eligible for Failure-to-Pay Penalty Relief

If your client is assessed a failure-to-pay penalty, they may be eligible for abatement if they meet these requirements.

1 min read

Micala Ricketts

Micala Ricketts

For the 2017 fiscal year, the IRS assessed 38.8 million civil penalties, amounting to $26.5 billion. Of those penalties, 4.3 million were abated. The most common reason for civil penalties assessed last year was failure to pay individual and estate and trust income taxes. On a related note, more than 400,000 notices of federal tax liens and almost 600,000 notices of levy were filed in 2017.

If your client is assessed a failure-to-pay penalty, it’s best that they deal with it as quickly as possible before their tax debt gets out of hand. You may be able to help them abate it if they meet the eligibility requirements. Here’s a quick look at what you need to know to help clients who have been assessed the penalty.

Failure-to-Pay Penalty Amount

Keep in mind, the failure-to-pay penalty is one-half of one percent (.5%) of the unpaid balance, added every month or partial month the payment is late. That penalty will continue to grow until it either reaches the maximum 25%, or the balance is paid in full.

A Look at Abatement Eligibility

The 3 reasons the IRS would abate your client’s failure-to-pay penalty are:

  • IRS error
  • Reasonable cause
  • Administrative waiver  

IRS Error

To be granted penalty abatement for IRS error, you must prove that your client received written tax advice from the IRS (that your client reasonably relied on) that led to the discrepancy in question. This argument is not often successful.

If you are requesting this type of penalty relief, you likely need to provide your client’s written request for advice, the incorrect written advice your client received from the IRS, and the report identifying the penalty and related error.  

Reasonable Cause

If the IRS approves the abatement of your client’s penalty due to reasonable cause, it means that in your client’s unique situation, the IRS found that your client would have paid their taxes owed if they had been able to do so. Circumstances such as a fire, natural disaster, serious illness, death, etc. (if established) count as valid reasons for why your client did not pay their taxes. Not having enough money to pay taxes does not, in and of itself, count for reasonable cause.

Note: If your client doesn’t have enough money to pay the tax debt owed, you should check into another method of tax resolution instead. An installment agreement or offer in compromise may be better for them.

Administrative Waiver

The IRS provides administrative penalty relief under certain circumstances, and first-time penalty abatement (FTA) is the most accessible administrative waiver. Your client may qualify for FTA if they meet the following:

  • They have no penalties for the three tax years prior to the tax year they were assessed a penalty.
  • They filed all currently required returns (or filed an extension).
  • They have paid, or arranged to pay, any tax due.

Your client may also qualify if they were not previously required to file a tax return.

Now that you’ve reviewed eligibility, you can check out this blog post to learn how to request penalty abatement for your client.

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