1. Many Americans believe in paying debt and see tax as a debt. But they regard penalties as just unwarranted punishment.
2. Many people have been falsely led to believe the IRS's Fresh Start Program allows for some new, magical way to reduce or eliminate IRS penalties.
As for the second reason, I blame the tax resolution “experts” who use the veiled promise of penalty relief to take advantage of people who aren't sleeping well and are desperate to hear good news. These “experts” will use a subtle tongue slip to take money. There is no such thing as IRS penalty relief under the IRS Fresh Start Program.
Unfortunately, penalty abatement almost never happens the way that it is portrayed. You must still qualify for penalty relief using one of the legal remedies that existed before the Fresh Start program existed as follows:
Even though I have helped hundreds of people with tax debt problems use the bankruptcy code to find relief, I consider it to be a last resort. For certain people with IRS penalties bankruptcy can provide penalty relief. Most penalties that meet the date requirements for tax debt discharge will be discharged in a chapter 7 bankruptcy. In a chapter 13 bankruptcy almost all penalties are treated as dischargeable no matter the age.
Don't run out and file a bankruptcy though. Alot of thought and planning has to go into a decision to file a bankruptcy case.
First Time Penalty Abatement
The IRS will usually give a first time offender a free pass and waive a late filing or late payment penalty. In order to get this abatement though, you have to be in current compliance with tax return filings, making any estimated tax payments, have no penalties assessed during the previous 3 year period, meaning paid and filed on time.
First time penalty abatement doesn't apply to the failure to pay taxes through the Electronic Federal Tax Payment System, or to one-time filing for gift or state tax returns.
Reasonable Cause. You will hear this phrase being thrown around alot by tax professionals but if you think about it…the phrase is reasonably meaningless. The IRS determines what is reasonable or not and even though it tries to treat these requests uniformly, it doesn't.
Generally, the IRS considers reasonable cause to be when you have done everything else right but despite those efforts you weren't able to comply. Most people have failure to file and failure to pay penalties so the argument usually revolves around why you were late and/or broke.
Serious illnesses, death in the family, caught in a hurricane, and things like this are often the best arguments to make but really just about any argument can be posed if it is based on reality and and the situation was really beyond your control.
The IRS will also look at and should grant penalty abatement requests based on the law. If for instance you can prove you mailed your return on time, or if there was a government slowdown etc. than the law sometimes orders the IRS to remove the penalty.
Administration Based Abatement
The IRS will often change the way it is doing something and it will realize that changing the process may confuse some people. When this happens there is usually some kind of administrative waiver that it put in place to forgive penalties out the outset for a certain period of time.
IRS Makes an Error
The IRS messes up all the time. They apply penalties when they shouldn't, lose returns, misplace payments, fail to make notes etc. etc. etc.
They will remove penalties or they should…if the penalty was based on the IRS' error and you can prove it.
IRS Offer in Compromise
Much like a bankruptcy a successful offer in compromise will reduce IRS debt. This includes the debt that has accrued as a result of penalty.
NO FRESH START BUT…..
There isn't such a thing as IRS Fresh Start Penalty Relief…sorry. Don't believe people who try and tell you there is. But there are ways to eliminate penalties in certain circumstances and sometimes with the right help.