No taxpayer enjoys receiving a penalty letter from the IRS, much less having to pay those tax penalties. The good news is that relief may be on its way with the help of a request by means of a penalty abatement letter. The penalty abatement process is an option many taxpayers do not know about, but it is a great way to remove your IRS penalties if you have a good reason for making a misstep with your tax return or tax payment.
The process to writing a penalty abatement letter isn’t difficult, but it is important to follow the proper steps to give yourself the best chance at success.
Before we get into how to write a penalty abatement request letter, there are a few things you should know. First, you need to have already filed your return. Next, you should try contacting the IRS directly before sending in a letter—sometimes they’re willing to work with you over the phone. Finally, if you do end up writing a letter, make sure to include any relevant documentation that can back up your claims. With that being said, let’s dive into how to write a penalty abatement request letter.
This guide will help you clear up any questions and provide you with all the information you need to know about tax abatement letters.
What Is a Penalty Abatement?
Penalty abatement is the process of completely removing an imposed tax liability by the IRS. You need to meet specific criteria before you can qualify for this relief, however. There needs to be a reasonable cause for this abatement, and the IRS must be willing to reconsider the penalty — which can be a challenge.
A reasonable cause usually refers to the following:
- Death or serious medical conditions of the taxpayer or their immediate family
- Flood, fire, natural disaster, or other disturbance
- An error by an IRS employee or the inability to get records when requested
- Failing to meet your federal tax obligations even when you used all ordinary business care. For example, mailing the payment or tax return on time but including the incorrect address or the wrong postage amount
Penalty abatement is the best option to reduce or resolve your penalty in many of these cases, but you need to comply with all the requirements involved in a penalty waiver before you contact the IRS.
Many taxpayers do not qualify for penalty relief. In 2019, just 12% of failure-to-file and failure-to-pay penalties were abated by the IRS, and only 9% of all individual penalties were abated. The IRS commonly denies initial requests, but some taxpayers just may not ask for an abatement when they could. It is crucial that you have a reasonable cause for the IRS to consider your request.
Common IRS Penalties
The IRS issues many different penalties to taxpayers for a variety of reasons. Here are a few of the most common:
- Failure to file your tax return on time, by the set deadline
- Failure to pay what tax you owe on time or correctly
- Failure to prepare your tax return accurately or completely
- Failure to include accurate information on your tax return
- Sending a dishonored check
- Failure to pay enough estimated tax throughout the year
The IRS may also charge you interest on one of these penalties if you don’t pay the full amount. Taxpayers can call the IRS to dispute a penalty or write a letter that states why they should reconsider.
How Does a Penalty Abatement Letter Work?
A penalty abatement letter notifies the IRS that you want the penalty removed for a reasonable cause. This letter documents the cause explains your specific circumstances, and is often the right course of action in situations where you made efforts to comply with the legal requirements, but — because of circumstances beyond your control — you could not meet your tax obligation.
The letter allows you to make a strong case with the IRS and outline every detail, including the type of penalty you want to be abated and an explanation of events. You should also attach documents that support and prove your claims.
The time these cases take to be processed varies greatly. Sometimes the matter can be resolved almost instantly if the situation is straightforward. Other times, the process can take months or even years to resolve. It is crucial to follow the right process to increase your chances of a quick and easy resolution.
Common Tax Abatement Letter Mistakes
Many taxpayers who are trying to get a penalty removed just don’t take the right steps for success. Here are a few common mistakes that you should avoid:
Not Being Clear About the Issue
Your letter needs to clearly state the reasonable cause for noncompliance and not be vague or misleading in any way.
Paying the Penalty
It is wise not to pay the penalty before you request abatement. You will eventually be able to request a Collection Due Process hearing if you have an unpaid balance, and the IRS may use this opportunity to consider the penalty abatement request in this hearing.
Including the Wrong Reasonable Causes
The IRS will not approve a request if the reasonable cause for noncompliance has to do with relying on a tax professional or a financial hardship.
Requesting Abatement After the Statute Expires
You do have a time limit on sending an abatement request. You can make a request within three years from the date the return was filed or two years after the penalty was paid.
Making these mistakes can lower the likelihood of the IRS approving the penalty abatement request. Talk your situation over with a tax professional before sending your letter to make sure you are on the right track.
How to Write a Penalty Abatement Request Letter
It comes as no surprise that those writing a penalty abatement letter for the first time worry about what to include. This process is not as complicated as you may think. The first step is to gather all of the necessary documentation. This includes your tax returns, any letters you have received from the IRS regarding your penalties, and any other documentation that supports your claims. Once you have everything together, it’s time to start writing your letter. It comes down to seven critical sections:
1. Record Your Information and the Penalty Information
This information includes:
- Your name
- The identification number
- The representative’s name (if you have one)
- The penalty information, including the specific years and forms in question and a list of penalties accrued by statute number
Always make sure that this information is clear, concise, and accurate.
2. State an Explicit Request for an IRS Penalty Abatement and Appeal
This section is where you include the specific penalties for which you are requesting an abatement and the reason for the request. Make sure to include:
- The reasonable cause
- Any administrative waivers
- The statutory exceptions
- Whether this is a correction of an IRS error
Additionally, make sure to provide an explanation for any previous penalty abatement requests in this portion of the letter.
3. Explain the Facts
Explain the circumstances of what happened. Include the following:
- Specific facts that support your reasonable cause defense
- Particular dates and events presented in chronological order
- Explanation of the attached evidence
You should also explain your compliance history and your swift attempt to comply with the IRS, if this pertains to your case.
4. Cite any Applicable Laws
In this part of the letter, you want to discuss the applicable law and authority. Keep these tips in mind:
- Make sure to cite any authority that provides for the abatement of penalties.
- The authority should include the IRS, any court cases, specific IRS policy statements, regulations, and IRM procedures.
Individuals usually decide to work with a trusted legal advisor to ensure their information is factual and accurate due to the complexities involved in this section.
5. Apply the Law to the Facts
Next, you will take the law and apply it to your situation. Make sure you explain each reasonable cause argument and how you acted with ordinary business care. As you are writing out these statements:
- Present all of your extenuating factors clearly and accurately
- Label each of your reasonable cause arguments
- Make sure to use the IRS’s Reasonable Cause Assistant Decision Tool
Don’t be afraid to elaborate on the fact that this was an isolated incident, discuss future compliance, talk about how your life was affected, and explain that you want to make a timely correction. Be professional and respectful.
6. Request for Next Action
Finish the letter by requesting that the IRS abate the penalty based on the facts and the law you presented, supporting your penalty relief. It is a good idea to make sure to include a statement requesting an appeal and your contact information, in case the IRS does not grant you relief.
7. Include Signature, Attestations, and Attachments
Your completed letter needs to have your signature and an attestation to the letter’s accuracy. Additionally, don’t forget to include a list of the attachments that you want to be reviewed with the request.
Following these steps is important to ensure that the IRS will look at your case. Of course, your situation may vary and require additional or different information, but these are the basics when you start writing your letter.
Tips for Getting Your Penalty Abated
You already know the mistakes taxpayers make with penalty abatement requests. There are things you can do to improve your chances of getting approved:
Understand Abatement versus FTA
The IRS invokes something called first-time penalty abatement relief (FTA). This can be used for failure-to-file or failure-to-pay penalties, as long as you’re in good standing otherwise and have a clean penalty history. These requests can be done by phone and are separate from reasonable cause relief. Consider going this route for a faster process if it applies to your situation.
Make Sure You Have a Reasonable Cause
This may go without saying, but make sure you actually have a reasonable cause for the late payment, late filing, or error before creating your letter. These requests must be legitimate, and you must have proof for the IRS to seriously consider them.
Show How Your Life Was Affected
Submitting a penalty abatement letter means outlining reasonable cause for noncompliance. Show how this reasonable cause impacted other areas of your life, whether an illness, natural disaster, or other cause.
Include a Timeline
Your evidence should show a specific timeline of events that support your case for noncompliance for a certain tax return or period. Your dates should align to tell a compelling story that the IRS can easily understand.
Discuss Your Compliance History
Another way to strengthen your case is to show how you have been consistently compliant in the past with filing and paying your taxes. For example, you may have had a small penalty in the past, so address this in your letter and explain what happened in those circumstances. Failing to leave this information out may look bad to the IRS.
Every tax abatement letter will not be approved. However, following these guidelines, making a strong case, and only submitting a letter if you have a legitimate, reasonable cause will improve your chances of getting the penalty removed.
How to Get Help with a Penalty Abatement Letter
Tax professionals at Silver Tax Group can:
- Analyze your tax issue and provide you with upfront pricing before getting started
- Go over the penalty abatement request and discuss the difference between first-time penalty abatement and reasonable causes
- Create a plan and work on the steps required to solve the issue with the proper tax authority
- Follow up with you to explain your results and the next steps required
A trusted tax advisor has the experience and professional approach to resolve your issues, no matter how complicated your penalty abatement issue may seem. They understand the proper steps you need to take for the best possible outcome.
All hope is not lost if you had issues with the IRS. Relief may be on the way. To see if you qualify for any of this relief, contact Silver Tax Group today. We can discuss your penalty abatement letter questions or provide you with information regarding any other tax-related items you may have.