IRS Penalties & Penalty Waivers

Oct 18, 2020

There are several types of penalties that the IRS can assess. The penalties are assessed at different rates and are set for different time periods. Getting those penalties waived can save hundreds and possibly thousands of dollars. You can even get your penalty waived from a previous year.

Tracking of Penalties

How does the IRS track these penalties? The IRS tracks penalties by tax form and year. That means if you file your taxes personally, they track it by your Form 1040 by the filing year. Say you file your 2018 Form 1040 late then it is going to be your 2018 Form 1040 that is assessed the penalty. The same thing goes for your business. If you filed your business tax return, say you are an S-Corporation, you have a Form 1120S filed late for 2018, then it is your 2018 Form 1120S that is assessed the penalty. This is an important distinction because if you are a business owner and you have an S-Corporation and you have payroll, your payroll tax forms (Form 941) are tracked separately, which means the penalties are also tracked separately. This also means that you can file for a penalty waiver for your payroll taxes and for your income taxes separately.

Types of IRS Penalties

Failure to File Penalty – a penalty assessed if you file your return late or if you do not file your return at all.
Failure to Pay Penalty – a penalty assessed if you pay your taxes due late or you do not pay at all.
Failure to Deposit Penalty – a penalty assessed if you fail to deposit payroll taxes
Underpayment Penalty – a penalty assessed for not paying quarterly estimated taxes if you own a business or have other sources of income outside of your W-2 job.
Substantial Understatement Penalty – a penalty assessed if you forgot to report some income on your tax return and then the IRS finds out about it.
Negligent Penalty – a penalty assessed if the IRS believes you are purposefully not reporting income.

Reasons for Penalty Waivers

Reasonable Cause Waiver – a reasonable medical or other reasonable inability to file taxes or pay taxes.
Statutory and Regulatory Exception Waiver – if you received incorrect written advice from the IRS.
IRS Error Correction Waiver – due to an error made by the IRS.
Administrative waiver – the IRS may formally interpret or clarify a provision to provide administrative relief from a penalty.

Reasons for Penalty Waivers

Reasonable Cause Waiver – a reasonable medical or other reasonable inability to file taxes or pay taxes.
Statutory and Regulatory Exception Waiver – if you received incorrect written advice from the IRS.
IRS Error Correction Waiver – due to an error made by the IRS.
Administrative waiver – the IRS may formally interpret or clarify a provision to provide administrative relief from a penalty.

First Time Abatement Penalty Waiver Process

The most common type of Administrative waiver is called the First Time Abatement. First Time Abatement is a relatively simple way to get a penalty waived if it is your first penalty in a while. The only penalties that qualify for this abatement are the Failure to File, Failure to Pay, and Failure to Deposit Penalties. To qualify for the First Time Abatement, you also must be currently compliant with all your tax returns. In other words, all your taxes must be filed, you must have a clean penalty history for at least the prior three years from the year that you are trying to abate, and you must be all paid up on your taxes or have an installment agreement in place. Having an installment agreement enables you to be compliant without paying your entire tax bill.For example, say you are trying to abate your 2018 penalty. That means years 2017, 2016, and 2015 must be clear of penalties for the tax return type you are trying to get waived. So again, if you are an S-Corporation you have a Form 1120S and you have the Form 941 which is your payroll tax. Now if you received a penalty in year 2017 on your payroll tax return (Form 941), that will not affect any penalty abatement for your 2018 S-Corporation tax return (Form 1120S). Therefore, it is important to know the distinction between the different tax forms and understand how the IRS penalties are tracked.The First Time Abatement is a relatively simple process. It is the simplest way to get your penalties abated, provided you meet the criteria explained above. One way to file for a First Time Abatement is to personally file a Form 843 with the IRS. You will need to get a record of your account from the IRS to make sure that you are compliant before you submit Form 843. Once you have determined you are compliant, you will need to complete the Form 843, submit it to the IRS, and wait. For the “explanation” you state that you request a first-time abatement. The second way to request a First-Time Abatement is to call the IRS and ask them to waive or to abate your penalty. The downside to this approach is that you will probably have to wait on hold for a few hours before you can talk to somebody. The third way to request a First-Time Abatement is to hire a tax professional. A tax professional will make sure that you are in compliance and then either file the Form 843 for you or they can make the call to the IRS and get the penalty waived. The real benefit of hiring a tax professional is that they can advocate on your behalf with the IRS agent. For the IRS agent to determine whether you qualify for a penalty waiver, they put your information through automated software and from previous experience, some of the agents do not really know how to use that software or sometimes that software incorrectly denies people their waiver.We are here to help. If you need assistance in preparing and submitting an IRS penalty waiver form, reach out to us at nguyencpas.com or support@nguyencpas.com and schedule a complimentary consultation with one of our advisors.