So, you've gotten an IRS tax bill and not only does it state that you owe more taxes than you think you should, but it's tacked on additional fees as well. These are penalty and interest fees, and they're standard IRS procedure. But is there anything that you can do about them? Well, yes, there is. You can simply request that they be abated; or, in plain English, that they be reduced or eliminated altogether. You may not have been aware that about one-third of all levied penalties are eventually abated.
But you must show 'reasonable cause', which simply means a good excuse. IRS agents are specifically instructed to carefully analyze any sound reason that you may have which could have led to your delay in filing or paying the proper tax. As a matter of fact, the Internal Revenue Manual lists seven categories of excuses for abating any tax penalty except fraud:
- Death or serious illness of the taxpayer or immediate family.
- Unavoidable absence.
- Destruction of the business or records by fire or other casualty.
- Inability to determine the tax because of reasons beyond the taxpayer's control.
- Civil disturbances.
- Lack of funds, but only when the taxpayer can demonstrate the exercise of ordinary business care and prudence, and
- Other reasons establishing that the taxpayer exercised ordinary business care but could not comply within the prescribed time limits.
As soon as you receive a tax notice that includes penalties, request an abatement in writing. Briefly state that you're requesting an abatement of penalties, identify the tax bill and explain what your reasonable cause is. Attach a photocopy of the IRS notice showing the penalty, along with any documentation supporting your request. Keep several copies of your letter and attachments (as you should routinely do with all correspondence to the IRS). Most penalties are imposed by the IRS Service Center that sent you the tax bill, so mail your abatement request there - not to your local IRS office.
If the IRS rejects your request, it will send you a written notice of its decision. To further contest the fees, your next course of action should be one of the following:
- Write back to the IRS asking for penalty appeals consideration. There's no standardized form for this; simply write a letter clearly stating your disagreement with the penalty and your reasonable cause. Title the letter "Penalty Appeal". Attach the appropriate tax bill and any supporting documentation that you may have.
- Call or visit your local IRS office and speak with a collection employee. They're generally authorized to consider 'reasonable cause' applications and cancel penalties. However, do not mention that a Service Center has rejected your request. If you're turned down again, ask orally and follow up in writing that they forward your case for appeals consideration.
- File an Offer in Compromise on IRs Form 656 based on doubt as to your liability for the penalty. This is a formal procedure for negotiating any unpaid IRS bill, including penalties. Be sure not to offer any money when contesting the penalty, because you're claiming that you don't owe it.
- Pay the penalty and then file IRS Form 843, Claim for Refund and Request of Abatement.
If your claim is still refused, technically you can sue in U.S. District Court or the Court of Federal Claims for a refund. Practically speaking, however, tax penalties are rarely large enough to justify the time and expense of such a lawsuit.
Getting interest removed from a tax bill can be even more difficult, unless it resulted from an IRS error. But there are some circumstances in which you could be successful:
- Of course, if a tax or penalty is abated, then interest on that amount should be canceled, as well. The IRS computer should do this automatically, but always check a tax bill to verify that the excess amount was removed.
- If interest charges resulted from delays by the IRS, you shouldn't have to pay them. For example, you settled an audit agreeing to pay more tax, but the IRS didn't send you a bill until a year later. That year's interest should be canceled. However, you can't get interest abated if it accumulated while you were challenging an IRS bill in an audit appeal or in court, unless the challenge proves successful.
- If the IRS concludes that you will never be able to pay the tax and interest charges, it may accept less in an Offer in Compromise.
- Tax owed, along with interest and penalties, may be reduced or eliminated through bankruptcy. This should, needless to say, be a last-resort effort.