Requesting & Filing for IRS Penalty Abatement

There are a few ways to request penalty abatement from the IRS. To be successful, you need to understand the requirements before submitting your request. Here are three options:

• Written Petition — A letter stating why your penalties should be erased.
• IRS Form 843 (Claim for Refund and Request for Abatement) — This is the official form for an abatement request. You can include a written petition along with this form.
• Verbally — If for some reason you cannot write, you can meet in person or talk to someone over the telephone to explain your situation. In most cases, we recommend you apply for first-time penalty abatement over the phone.

Supporting Documents for Penalty Abatement

With all of these methods, you need to show the IRS evidence of the reason why you are requesting abatement. For instance, if you are claiming that a family member’s death prevented you from filing on time, you need a copy of the death certificate. Moreover, other examples include doctor’s notes for illnesses and proof of insurance claims related to natural disasters, theft, or fire.

Additional Tips for a Penalty Abatement Request

If you want the IRS to eliminate penalties, you should keep the following tips in mind.

• If using a written petition, write it like a formal letter.
• Make your letter short and to the point. Provide ample details without over-explaining.
• If you choose to submit IRS Form 843, it is a good idea to submit a written petition as well.
• Be sure to submit supporting documentation for the reason you are claiming.
• Don’t send the IRS original copies of your documents. Only send copies in case something gets lost.
• Send the written petition to the address listed on the assessment letter you received from the IRS.
• If you want to verbally request penalty abatement, contact your nearest IRS office and ask for a face-to-face meeting.

When you mail your documents to the correct address for your penalty abatement request, the IRS should respond within 60 days. If the IRS doesn’t respond, send another copy of your request and the supporting documents. If the IRS denies your request, you cannot use the same reason to apply again.

If you are looking for assistance with a tax professional who has penalty abatement experience, you can start here or you can begin a search below: 

IRS Verified Financial Installment Agreement

A verified financial installment agreement is just an installment agreement that requires financial disclosure in order to be approved. Generally, if you owe over $250,000 (formerly 100k) you will likely need to disclose your financial situation (although recent IRS changes regarding Covid have been an exception to this guidance) in order to obtain an installment agreement. To qualify, you may need to submit a Collection Information Statement. That includes information about your assets, income, liabilities, and expenses. However, recent IRS changes due to Covid-19 have made access to non-streamlined installment agreements up to $250,000 easier without financial disclosure (assuming no Revenue Officer is assigned to the account). 

It is highly recommended that you use a licensed tax professional if you want to improve your chances of success with your application. Generally, the IRS prefers you pay down balances or liquidate assets if you owe over $250,000. 

Here are the general requirements for an installment agreement requiring financial disclosure:

• Businesses that owe over $25,000 and individuals who owe over $250,000. This includes individuals who owe between $25,000 and $50,000 and do not want to pay via direct debit or payroll deduction (assessed balance)
• Completion of Form 9465 (Installment Agreement Request).
• Completion of Form 433 (Collection Information Statement). There are different versions of this form, individuals usually need to complete 433-F.
• Cannot be in bankruptcy.
• Have not had an Offer In Compromise accepted.
• Completed previous six years of tax returns.
• Compliant with IRS payments in the past.
• There are exceptions where new tax liabilities can be rolled into existing Installment Agreements

How To File A Verified Financial Installment Agreement

• Call 1-800-829-1040 to speak to the IRS.
• Print and complete IRS Form 433 (Collection Information Statement) if the IRS asks for it. Generally, 433-B is for businesses and 433-F is for individuals.
• Send these forms and a copy of your tax return to the IRS. If you Efile your return, just send Form 9465 and Form 433 to the IRS. The address varies based on where you live, so you may want to double-check the appropriate IRS address.

Special Instructions for Form 433-F

Many individuals need to complete Form 433-F. Here is an overview of what to expect on that form.

• Part A: Accounts and Lines of Credit. List all your financial accounts such as checking accounts, IRAs, 401ks, brokerage accounts, etc. You need to include at least 90 days worth of statements for all of these accounts.
• Part B: Real Estate. Note your properties including your primary residence, vacation homes, and timeshares. Then, list your monthly payments, and write the equity of each property. Equity is the value of the property minus what you owe on it.
• Part C: Other Assets. This includes automobiles, boats, and life insurance policies. You also have to note monthly payments and equity.
• Part D: Credit Cards. List all credit cards, their balances, and your minimum monthly payments. This includes store cards.
• Section E: Business Information. Note any accounts receivables owed to your business and include information about whether or not your business accepts credit cards.
• Part F: Employment Information. Share details about your income and your spouse’s income. You need copies of your paystubs and contact details for your employers. You also need to note how often you get paid.
• Part G: Non-Wage Household Income. Detail other sources of income. This includes alimony, child support, self-employment income, rental income, and pension. It also includes unemployment income, social security payments, and interest and dividends.
• Part H: Living Expenses. Explain what you need to live on and fill in your dependents.  This section includes monthly expenses for rent, food, transportation, mortgages, student loan payments, medical bills, and more. You also need copies of bills for the last three months.

Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney within our network.

Tax Relief Services Offered By Tax Professionals

When you run into problems with your taxes there are many services offered to help clear up your problem. It is best to talk with a licensed tax professional to find the best solution for your unique tax problem and financial situation. The IRS has many different filings to help people through different problems. Here are some of the options or services commonly offered by various tax professionals. 

How Tax Companies Work: What to Expect With Services

Understand how tax relief companies work. Understanding how their services work is important before making a decision on hiring a company to help you. Most companies work in the same manner, but it is important to not be pressured into signing up with them and it is important to get all your options before making a decision.

How to Find the Best Local Tax Relief Company

Finding a tax relief company that is best for your unique situation is not an easy task. There are many review sites out there saying that they have rated the top companies, but are these the best ones for you? Here are some things to look out for when looking at review sites and talking with these companies. Understand some of the tactics they use and why many times, it is better to consider a local firm. Local firms generally are not as easy to find considering they don't have the marketing budgets like the larger firms. This guide will give you insight into find the best company for your unique situation.

Tax Settlement Services

If you would like to settle IRS and/or state taxes a tax relief company can analyze your financial situation and find which tax settlement method would work best for your particular tax situation. There are many different forms of settlements and it is important to get a professional opinion before selecting which one is best for you.

• Offer in Compromise

  With an offer in compromise, a taxpayer can settle their taxes owed for far less than they owe. For this reason, many offers in compromise are not accepted by the IRS. Using a tax professional to make this filing greatly increases the likelihood of success. Some states do not offer an offer in compromise so check with a tax professional familiar with your specific tax agency.

• Penalty Abatement

  If you would like to abate tax penalties, and you qualify for first-time penalty abatement or have reasonable cause,  you can have a tax pro assist. Tax professionals are trained and experienced in knowing what the taxation authorities (IRS or a state) may require, who qualifies and how it works.

• Innocent Spouse Relief

  The IRS (and some states) do realize that there are times it would be unfair to hold a spouse liable for taxes owed due to a joint tax filing. Innocent spouse relief is a difficult filing and tax relief professionals can ensure the proper paperwork is filed and follow through with filing to ensure all tax liabilities have been lifted from the “innocent spouse”.

• Payment Plan Negotiation and Setup

  If you do not qualify for a method to pay less than you owe, a tax professional will find the best method to pay back the taxes you owe under a payment plan authorized by the IRS (or a state tax agency). A tax professional can find what payment method works best for you and work out an affordable payment plan to pay back the taxes owed for federal and or state taxes.

• Hardship/Uncollectible Service

  If you cannot pay your taxes owed it is possible to temporarily stop collection actions of the IRS and be declared uncollectible for a period of time until your financial situation improves enough where you can pay the IRS. In order to do this proper paperwork must be filed to prove your poor financial situation with the IRS. Some states offer this option as well.

File Back Taxes Service

If you have outstanding returns that have not been filed for any amount of time, even if you are missing important tax documents, a tax professional can ensure these returns are filed appropriately with the IRS, while ensuring maximum deductions. If you find you owe more taxes than you owe a tax professional can also set you up with a tax settlement.

Remove a Tax Levy

If the IRS (and sometimes a state tax agency) begin to seize assets from you, either through your bank account, wage garnishment or physical seizure of assets, a tax professional generally can help quickly. A tax professional can find the appropriate tax settlement method and file the proper paperwork to ensure the IRS (or state tax agency) does not seize any assets.

• Stop IRS Wage Garnishment

  If your wages are being garnished by the IRS a tax professional can quickly stop the wage levy and come up with the best solution for you. A tax professional will analyze your tax, financial, and work situation to determine the best course of action.

• IRS Bank Account Levy Help

  If your account has been frozen, our partnered tax professionals can quickly analyze your situation and come up with the best method to resolve your tax problem and prevent the bank account levy. Find out more about how services work by reaching out to a tax professional on TaxCure.

Remove a Tax Lien

A tax lien will remain in place until you have paid off your taxes or until you have made some other agreement with the IRS (varies by state tax agency). A tax professional will be able to find the best way for you to get back into good standing with the IRS and/or state tax agency to remove or release a tax lien while not creating financial hardship for you.

Audit Representation

Did you receive a notice of audit? If you have one of our partnered tax relief firms can represent you in your audit and make sure everything is presented in the correct way. Did you know audits go both ways, a tax professional will review your tax filing to see if there are any other deductions you missed? Tax professionals have many tactics in audits to ensure things go over smoothly.

Finding Professionals That Help With Specific Problems or Solutions

If you are looking to connect with a tax professional for your specific tax problem or you have a particular solution in mind, you can start your search below by selecting the agency/agencies involved and location if that is important to you. You can then filter further to find the exact professional with the experience you need.

Innocent Spouse Relief: Guides, Types, Rules & Forms

When you file a joint tax return with your spouse, both of you are liable for all of the tax, penalties, and interest. Even if all of the tax due was from your spouse's income, you are still liable. Because of this, the IRS or the states can legally go after both spouses or just one spouse for the entire bill on a joint return.

Unfortunately, even if you get divorced and the decree says that your ex is responsible for the bill, the IRS can still go after you. Luckily, there is innocent spouse relief (ISR). Innocent spouse relief applies in situations where it would be unjust to hold both of you responsible for the joint tax liability.

What Is the IRS Innocent Spouse Rule?

The IRS's innocent spouse rule offers relief to taxpayers in situations where it would be unfair to hold them responsible for their spouse or former spouse's taxes. There are three different types of innocent spouse relief, and they all have different rules and requirements. However, they all apply in cases where a couple has filed a joint return and one person wants or needs relief from the other one's tax bill. 

The person who applies for this type of relief is called the requesting spouse. If you qualify for relief as the requesting spouse, the IRS will basically declare that you are not liable for the taxes of your spouse or former spouse. Concerned about a tax bill due to your spouse or ex-spouse's actions? Want to know about your options? To help you out, this guide provides an overview of the three types of relief from innocent spouses, and it has links to pages with more information about this IRS program. 

Classic Innocent Spouse Relief

This program is based on the IRS's original type of innocent spouse relief. There are specific qualification requirements, and the issue must be related to an understatement of tax on a joint return. For instance, if your spouse underreported income on your tax return without your knowledge and that led to a tax bill, you may want to apply for this type of relief. Similarly, this option can also apply in situations where your spouse incorrectly claimed a credit that lowered the tax bill.

Fortunately, if the IRS accepts your request and decides to grant innocent spouse relief, the IRS does not hold you liable for the tax amount related to your spouse or former spouse's unreported income. The application process can be complicated so you should consider working with a tax professional. To qualify, you must not have known about the understatement of tax. But you can't just say that you didn't know. You also have to prove that there was no reason for you to know. When reviewing this issue, the IRS takes multiple factors into account including your education, your involvement in the family finances, and whether or not you benefited from your spouse or ex-spouse's actions.   

Separation of Liability Relief

With this type of relief, the IRS allocates the taxes on your joint tax return between you and your spouse/ex-spouse, as if you filed your tax return separately. Allocation does not have to be half and half. It varies based on who’s responsible for what. To give you a quick example, imagine that your spouse earned $100,000 and you earned $50,000. When the IRS separates your liability, it makes you responsible for the tax related to your $50,000 in income, and it holds your spouse responsible for the tax related to their $100,000 in income.

You can only apply for separation of liability relief if you don't meet the criteria to apply for traditional spouse relief. Additionally, your marriage must be over. You must be widowed, separated, or divorced. Generally, to qualify as separated, you must have lived apart for at least a year and you must no longer have a romantic relationship. If the IRS has reason to believe that you are still together or that your spouse is going to move back in, it won't let you get this type of relief even if you don't live together. 

IRS Equitable Tax Relief

You can apply for this type of relief if you have understated or underpaid tax. As indicated above, understated tax occurs when someone fails to report income or claims credits they don't deserve. As a result of these actions, their tax return shows that they owe less than they really do. In other words, the tax return understates their tax bill. Underpaid tax, in contrast, occurs when the tax return shows the correct tax due, but it has not been paid. 

Equitable relief helps people who don’t qualify for the other types of relief. For instance, this might apply in a situation where you believed that your spouse paid the tax bill, but instead, they took their secret lover on a cruise. To qualify for this type of relief, you must prove that it would be unfair for the IRS to hold you responsible.

How to Request Innocent Spouse Relief

If you believe that you should not be held responsible for taxes owed because of erroneous information provided by your spouse or former spouse, you may be eligible for innocent spouse relief. Innocent spouse relief may also be available if your spouse failed to disclose important information, or if you were unaware of an underpayment or understatement of tax.

To request innocent spouse relief, you must file Form 8857 with the IRS. You must complete and sign the form under penalties of perjury, and you must include a statement explaining why you believe you should qualify for innocent spouse relief. If you are requesting innocent spouse relief from joint and several liability for tax, interest, and/or penalties, you must also attach a copy of your federal income tax return for the year in question.

Once your Form 8857 is received, the IRS will send you a notice requesting additional information or documentation if needed. The IRS will also notify your spouse or ex-spouse so they can make their case. Unfortunately, there are no exceptions to this rule, but the IRS won't reveal your contact details to your spouse. Once all required information has been received from the requesting spouse and the other spouse or ex-spouse, the IRS will review the case and make a determination. If the IRS grants innocent spouse relief, you will no longer be held responsible for the unpaid taxes, interest, and/or penalties that were due to your spouse. Of course, however, you will still be responsible for your own portion of the taxes. If your request is denied, you have the right to appeal the decision.

Frequently Asked ISR Questions

To help you know what to expect, we've put together some of the most commonly asked questions about innocent spouse relief. The above link has questions and answers about innocent spouse relief, equitable relief, and separation of liability. Alternatively, you can also contact a tax professional. They can answer your questions and help you decide if this is the right program for your situation. 

Innocent Spouse Tax Relief Help and Services

Not all tax professionals and tax companies have experience in helping with innocent spouse cases. At TaxCure, we have made it easy to quickly find professionals that specifically can help with innocent spouse cases. You can click this link to see top-rated tax professionals that have experience with innocent spouse, or you can start your search below and select the applicable tax agencies as well as your tax problem and/or desired solution. Once you narrow down your search to a few contenders, give them a call to talk about your tax problems and decide if they are the right professional for you. 

IRS Penalty Abatement: Removing Penalties Owed

If you don’t believe that you should have to pay certain federal penalties or interest, you can apply for IRS penalty abatement. If you qualify, the IRS removes some or all of your penalties. 

To qualify, you need to prove that there was a reasonable cause for filing or paying late. In some cases, you can qualify if the IRS made an error or delayed your return, or if the IRS gave you bad advice in writing that led to the penalties and interest. You can also receive abatement for the first offense and it is one of the penalties the IRS will abate.

Reasonable Cause for Penalty Abatement

If you can prove that there was a serious reason you didn’t file or pay your taxes, you may qualify for reasonable cause. Follow the link to find out about reasonable cause.

IRS Delays or Errors

If the IRS made mistakes on your assessment, you may apply for abatement in this category. You can also apply if the IRS caused delays.

Bad Written or Oral Advice From the IRS

When you have penalties due to receiving incorrect advice from the IRS, you can apply for this type of abatement. It is rarely seen. See the link above for more information.

First Time Penalty Abatement

The First Time Penalty Abatement (FTA) program is for taxpayers with a good track record of compliance. If you have late payment penalties or other penalties for the first time, you may qualify. This program is not for repeat offenders.

Requesting and Filing for Penalty Abatement

You can request abatement on failure-to-file and failure-to-pay penalties. You can also request abatement on return accuracy penalties, but you need to use special procedures and may even need to take the IRS to court. 

You can apply verbally, in writing, or by using Form 843. Regardless of the method you choose, you need to explain what you failed to pay the taxes owed. 

 

Sample Penalty Abatement Letter

You can request penalty abatement by writing a letter to the IRS. The letter should explain why you deserve abatement. Fortunately, we have a sample petition letter so you get a sense of what the IRS may expect. It is for information purposes only. We believe calling the IRS can be more effective in many cases.

IRS Form 843 Instructions & Details

You can use IRS Form 843 to claim a refund or ask for an abatement. The link above provides details and instructions for this form.

Applying for Relief on the Estimated Tax Penalty

The estimated tax penalty is generally not abatable, and to get relief from this penalty, you need to request an exclusion when filing your tax return. You can request an exclusion by filing Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts).

IRS Form 2210 Instructions and Details

You can file Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts).

with your individual tax return. This is the same form that you use to calculate your penalty, but it also has a section where you can request relief on some or all of these penalties. 

How Many Penalties Are Abated Every Year?

The IRS abates a small portion of tax penalties every year. For example in 2019, the agency abated just 9% of total individual penalties and 12% of failure-to-file and failure-to-pay penalties. 

The main reason the IRS doesn't abate penalties is that most taxpayers don't request penalty abatement. In cases where taxpayers request abatement, the IRS often denies the first request, and although they are allowed to appeal, most taxpayers don't. 

If you want to get tax penalties abated, you need to be proactive about contacting the IRS, and you need to be willing to appeal a denial. Additionally, you need to take steps to increase your chance of penalty abatement. 

Tips for Penalty Abatement

If you have tax penalties that you want to get waived, you should follow these tips. They are designed to boost your chance of success:

1. Always take advantage of first-time-abatement — The IRS will typically remove all penalties related to a first-time offense whether you can show reasonable cause or not. You can request first-time abatement over the phone.
2. Request reasonable cause in writing — Don't call the IRS if you want to request reasonable cause. Instead, make your request in writing and be ready to thoroughly explain your situation. The IRS accepts phone calls on this issue, but written requests are usually more successful. 
3. Use Form 843 to request reasonable cause — Although the IRS allows you to write a letter or use Form 843, you should use the form. It has all of the details you need to include. In contrast, if you write a letter, you may accidentally omit critical information. 
4. Be detailed with reasonable cause requests — When explaining why you were unable to pay or file your return, make sure that you show how the situation affected the rest of your life. For example, if you filed late due to an illness, also explain how the illness prevented you from working or attending events. Then, map out a timeline of what happened. 
5. Demonstrate past compliance — The IRS is much more likely to abate penalties for people who are generally compliant with tax regulations. Show your past compliance, and explain why you incurred any previous penalties.
6. Follow up — Sometimes, the IRS loses penalty abatement requests. Make sure to follow up on your request and submit additional documentation as needed. 
7. Appeal denials — If the IRS denies your request for penalty abatement, always appeal. Most first-round denials are computer-generated, and you will get more favorable results by talking with a real person.

Also, consider working with a professional. Tax professionals work with the IRS every day and they understand what the agency wants to see with penalty abatement requests. 

Mistakes to Avoid With Penalty Abatement

When you're trying to get penalties removed from your account, you may want to avoid paying the penalties. If you have unpaid taxes or penalties, you can request a Collection Due Process (CDP) hearing which gives you a chance to explain your situation to the IRS. If you don't have an unpaid balance, you cannot request a CDP so you lose out on this potentially valuable angle.

If you're applying for reasonable cause on a failure-to-file penalty, make sure that you don't claim financial hardship or reliance on a tax professional. The IRS will not accept either of these two excuses as reasonable cause in this situation, and the agency has won many court cases fighting this issue. 

The IRS doesn't accept financial hardship as a reason for not filing because the agency offers a number of free filing tools and workshops. Additionally, the agency tends to reject claims related to incorrect advice from tax pros because filing rules and deadlines are well-publicized to the general public. 

Finally, remember to keep the statute of limitations in mind. You must apply for penalty abatement within three years of the date the return was filed or within two years of the date the penalty was paid. 

What to Expect When You Apply for Penalty Abatement

The process varies based on the type of penalties and how you request abatement. If you request first-time abatement over the phone, you can get instant approval, but the IRS may take around three weeks to credit your account. 

The IRS takes two to three months to review a written request for penalty abatement due to reasonable cause, and if you need to appeal their decision, the process can take six to 12 months. 

Penalty Abatement Service and Help

When you work with tax services professionals, they gather the necessary tax records and prove to the IRS that the penalties should be removed. These services reduce your overall taxes and make your payments smaller. Here’s more information on that process.

You can find a list of tax professionals with penalty abatement experience by doing a search below and then using the search solution filters to filter by "penalty abatement."

Reasonable Cause for Penalty Abatement

The IRS takes penalty abatement requests on a case-by-case basis. If you are not applying for first-time penalty abatement, generally you need a good reason(s) why you paid or filed late. This is called reasonable cause, and it's the most common reason for penalty abatement.

To qualify for reasonable cause, you basically have to convince the IRS that you had a legitimate reason for not paying or filing on time. You also have to prove that you were exercising ordinary care and prudence.

What Is Reasonable Cause?

Reasonable cause is any legitimate excuse for not paying or filing on time. The issue must be out of your control. Also, you must prove to the IRS that you tried to file but that it was basically impossible.

Here are some common examples of reasonable cause:

• Death of a family member or someone very close to you.
• Unavoidable absence such as being in rehab or jail.
• Held hostage in another country.
• Destruction of your records due to fires, floods, or other casualties.
• Could not make payment or deposit due to civil disturbance such as a mail strike or a riot.
• Unable to determine the amount of tax for reasons beyond your control.
• Received incorrect advice from a tax professional who is considered competent and trustworthy.

Additional Information to Prove Reasonable Cause

If your situation is not listed above, the IRS will look deeper into your case. Here are some of the questions IRS agents may ask. These questions help determine if you should receive penalty abatement.

• What were the circumstances of the situation that caused your problem? Furthermore, why did these circumstances keep you from complying with tax laws?
• Do you have a history of paying late? If you have a history of being delinquent, your chances of abatement go down dramatically.
• How were other financial problems handling during this time? The IRS wants to know if the tax bill was the only one ignored or if other bills were ignored as well.
• Do the dates of the issue match the time of the tax due date or filing deadlines?
• Was the situation anticipated?
• Were the circumstances outside of your control? Did you have any control over the situation?
• How strong is your support? Do you have third-party documents? Doctors’ notices? Hospital bills? News of abduction?

The requirements for penalty abatement are more open than almost all other types of tax resolutions. The IRS puts an actual face on your case instead of a computer, and penalty abatement can be much easier to attain than other types of settlements.

As a general rule of thumb, the most important issue is whether or not the situation was out of your control. For best results, you should work with a tax relief professional who specializes in helping people with penalty abatement.

How to Apply for Penalty Abatement Due to Reasonable Cause

You can apply for penalty abatement due to reasonable cause over the phone or in writing, and the IRS allows you to submit a letter or use Form 843. Although calling the IRS can be very effective when you're applying for first-time penalty abatement, it does not work as well with reasonable cause. 

To increase the chances of having your penalties waived, you should apply in writing using Form 843. This form outlines all the details the IRS wants to know, and it helps to ensure that you don't forget to include any critical information.

Tips for Applying for Reasonable Cause

The IRS waives less than 10% of individual tax penalties every year, and the main reason for the low abatement rate is because taxpayers don't request penalty abatement. Additionally, most initial requests are automatically rejected by the IRS's computers, and most taxpayers don't appeal their denials. 

Simply applying and appealing can go a long way, but you should also keep these tips in mind if you want your application to be successful:

1. Be detailed about your reason — When explaining why you couldn't pay or file your taxes on time, be very detailed about your reason. 
2. Explain how your cause affected the rest of your life — The IRS doesn't want to be the only entity that was ignored, and the agency is more likely to remove your penalties if you explain how your situation affected the rest of your life. For example, if you didn't pay your taxes due to an illness, you should also explain how that illness prevented you from going to work, pursuing your hobbies, or paying other bills.
3. Provide evidence — Make sure you back up your claims with evidence. For instance, you may need to include medical records if an illness prevented you from paying your tax bill or insurance claims if a fire burnt your financial records and caused you to file late.
4. Draft a timeline of the situation — Create a timeline of the situation that shows how it affected your ability to be compliant with tax regulations and why you are able to get back into compliance now.
5. Show prior compliance — The IRS will be more likely to approve your request for reasonable cause if you were compliant with past filing and payment requirements. If you had a penalty in the past, be ready to explain why.

Aside from following these tips, make sure that you follow up on your application. The IRS's online system doesn't show the progress of penalty abatement requests, and the agency has a history of losing these requests. You may need to follow up by phone to ensure that your request is being processed. 

Common Reasons for Reasonable Cause Rejections

Again, if you want to have your penalties abated, you need to convince the agency that a situation outside your control caused you to pay or file late, and a detailed application is critical to this process. However, it's important to note that the IRS usually rejects reasonable cause requests on failure-to-file penalties due to financial hardship and reliance on a tax pro. 

The IRS's computer systems are programmed to automatically reject these two reasons for failure-to-file penalties. Even if you have additional reasons that you didn't file your return on time, the system will reject your request if it sees that you marked reliance on a tax pro. 

Similarly, although financial hardship can be a successful angle when you're trying to get failure-to-pay penalties waived, the IRS doesn't see this as a valid reason for not filing your tax return on time. The agency offers several free filing options and filing assistance so that taxpayers can submit a return even if they are suffering from financial hardship. 

Usually, financial hardship has an underlying cause, and if you couldn't file due to financial hardship, consider explaining the reason for the hardship. For instance, if you couldn't work due to being in jail, grieving a loved one, or being ill, you should highlight those reasons on your penalty abatement request instead of the financial hardship.

Why You Shouldn't Pay Penalties When Requesting Abatement

If you like, you can pay the penalties before you request abatement, and if your abatement request is successful, the IRS will send you a check. However, paying penalties before you request an abatement can work against you. 

When you have an unpaid tax bill, the IRS allows you to request a Collection Due Process (CDP) hearing, and during this hearing, you can present your case directly to an IRS agent. If you pay off your tax bill and all your penalties, you lose this avenue. 

The Reasonable Cause Review Process

If you request reasonable cause penalty abatement in writing, the IRS will usually take two to three months to make an initial decision, and if you appeal the agency's decision, the process can take six to 12 months. 

Make sure that you apply in a timely fashion — you only have three years from the date the return was filed or two years after the penalty was paid to request abatement. 

Get Help Applying for Penalty Abatement

If you are looking for assistance from a tax professional who has penalty abatement experience, you can use this link or you can start a search below: 

What Is an IRS Offer in Compromise: Settling Taxes for Less

An offer in compromise is when the IRS lets you pay off your federal tax debt for less than you owe. Many states (but not all) will also let you compromise on your taxes. An IRS Offer in Compromise allows a taxpayer to make an offer for less than the total amount owed on their tax bill. If the IRS accepts the offer, you pay less than you owe, and the IRS wipes clean the rest of the tax debt. 

To help you determine if the IRS compromise program is right for you, this guide covers the basics, and it has links to resources with more details. 

How to Qualify for an Offer in Compromise

You must meet certain requirements to qualify for an Offer in Compromise. The Internal  Revenue Service will only settle tax debt for less than you owe if you meet the qualification criteria. The following statements must be true for you to qualify:

• You have received a bill for the taxes you want to settle.
• You aren't in an active bankruptcy case.
• You have filed all your required tax returns.
• You have paid all of your required estimated tax payments. 
• You have made all of your required federal tax deposits.  

On top of that, you also must meet the eligibility criteria for the specific type of offer you want. There are three main situations where you might qualify to settle your tax bill for less than the full tax liability, and they each have different requirements. 

Types of Offers in Compromise

These are the three options you can use if you want to apply for an offer in compromise. 

1. Doubt as to Collectibility — This is the most common option. It applies when you can't afford to pay your full IRS tax debt. 
2. Effective/Fair Tax Administration — You may be able to afford to pay in full or pay a larger offer, but the IRS accepts a smaller offer to be equitable. This option applies in cases where it would be unfair to require you to pay the IRS tax debt in full.
3. Doubt as to liability — This applies when you believe that you don't really owe the full tax bill, and the IRS agrees to waive the part of the bill that you don't owe.

How to Apply for an IRS Offer in Compromise?

If you meet the qualification criteria, you can apply for an offer in compromise. You must send the right forms and supporting documentation to the IRS. You also need to make an offer. A tax attorney or tax expert can help you narrow in on an offer amount that is likely to get accepted. They can also help you with the paperwork. 

Required Documents for an Offer In Compromise

Requesting an IRS Offer in Compromise requires a lot of paperwork. Furthermore, you must file everything correctly if you want your offer to be approved. Check out the above link to look at the forms you need to file and to learn more about them. 

IRS Form 656-B

This resource includes details on when to use IRS Form 656-B and how to complete this form when requesting an offer in compromise. This form will identify the tax years and tax types that you would like to compromise. This form also provides details on your offer amount along with the payment terms you are seeking. You should apply with this form if you're applying based on doubt as to collectibility or effective tax administration.

If you're applying with Form 656-B, you also need to include a lot of financial information. The application booklet has the forms you should fill out. If you're an individual, you fill out  433-A. Businesses should fill out Form 433-B. In a lot of cases, you may need to do both of these forms.

IRS Form 656-L

If there is legitimate doubt about the tax amount owed, you may be able to reduce your taxes through an offer in compromise based on doubt as to liability. The normal offer in compromise program people use is when there isn't a doubt to the liability, but there is an inability to pay the balance. 

To file for an offer in compromise for doubt as to liability, you must use IRS form 656-L. This resource explains this OIC program, how to apply for it, and when to look at other alternatives. 

The IRS forms aren't the only documents you need to apply for an offer in compromise. You also need to provide supporting documents. If you apply because you can't afford to pay, you need to include three months' worth of account statements plus proof of all the numbers you put on your application. If you apply based on doubt as to liability, you need to include documents that show you owe less than you do. 

Submitting an Offer

When you apply for an IRS offer in compromise, you have to submit an offer. There is a specific part of the application where you note your offer and how you want to pay it. There are more details on the payment options below. You need to make your offer carefully if you want the IRS to approve your application. The optimal offer varies based on your situation and the type of offer in compromise program you apply for.

How Much Should I Offer the IRS?

Here are some tips on how much you should offer to pay on your tax debt based on the different types of programs. 

Doubt as to collectibility — The IRS only accepts offers if they are for more than the IRS would get in any other situation. In other words, your offer needs to be more than the IRS could collect through wage garnishments or seizing assets. You will need to take your monthly income, expenses, assets, debts, and future income into account when calculating this offer. 

Effective tax administration — The IRS will accept your offer if it's fair and requiring you to pay more would lead to economic hardship. You also have to take your finances into account when choosing the offer amount.

Doubt as to liability — Your offer should reflect the amount that you believe that you truly owe. With this program, you're asking the IRS to settle the part of the tax bill that you believe that you really don't owe. You don't have to take your monthly income or future income into account for this option.

What Is the Minimum Offer Amount on an OIC?

The IRS doesn't have a set minimum offer amount. The minimum amount for you varies based on your situation. That said, you certainly don't want to offer more than you need to. When you work with a tax pro, they can help you narrow in on the sweet spot for your offer.

Special Circumstances When Applying for an IRS Offer

The IRS's OIC requirements are very specific. In particular, the agency has very specific expense allowances that it allows you to use when calculating your offer. For instance, the IRS has certain amounts that it thinks people should spend on housing, transportation, and utilities. 

If you're spending a lot more than the allowed amount, the IRS won't let you take those expenses into account when calculating how much you can afford to pay. However, if you have special circumstances that require you to spend more, you can explain that in your application. 

What Happens After the IRS Accepts Your Offer?

If the IRS accepts your offer, you must make the payment within the time frame specified in your offer. After your payment, you are in good standing, and you don’t owe anything else for the tax period where your tax debt was settled. However, you will need to stay in tax compliance for five years going forward, or the IRS can rescind the offer and demand full payment if you don't stay compliant.

Paying for Your Offer in Compromise Settlement

If the IRS accepts your Offer in Compromise, there are two main payment options. When you apply, you choose the method that works best for your situation. You can opt to pay off the offer in a lump sum payment, or you can choose to make periodic payments.

You also have to send an initial payment with your application if you apply based on doubt as to collectibility. There is also an application fee. If you apply based on doubt as to liability, you don't have to send an initial payment or the application fee. Check out this resource to learn more about how the different payment options work and how they affect your offer amount.

What Happens If the IRS  Rejects Your Offer?

If the IRS rejects your offer, the full tax liability is due. You should make arrangements to pay off the tax debt. For instance, you may need to set up monthly payments or look for another resolution option. Alternatively, if you don't agree with the reason for the rejection, you can appeal.

How to Appeal a Rejection of an Offer In Compromise

The IRS may return your offer if you don't meet the requirements or haven't provided the right information. If you submit everything and the IRS doesn't agree with the offer, it can reject your application, but luckily, you can appeal. Look at this resource to check out the reasons why an IRS Offer in Compromise may be rejected, and learn how to appeal a rejection.

Offer in Compromise FAQ

Even if you read all the resources above, you'll probably still have questions about the offer in compromise program. This is one of the most appealing IRS programs because it can help you to save so much money on your tax bill, but it's also one of the most confusing programs. Follow the above link to look at answers to the most common questions about the IRS’s OIC program.

2021 Updates to the IRS Offer-in-Compromise Policy

As of November 1, 2021, the IRS has updated its OIC policies to make the process easier for taxpayers. In the past, the IRS kept tax refunds from taxpayers who had been approved for an OIC in the same calendar year. 

For example, if someone was approved for an OIC on their 2017 and 2018 taxes in 2020 and they earned a refund when they filed their 2020 tax return, the IRS had the right to keep that refund. Under the new rules, the IRS will no longer keep these refunds. 

However, the IRS can still keep refunds that you earn while the application is pending. However, if a taxpayer is experiencing financial hardship, they can ask the IRS to not keep the refund. Then, the IRS will look at the exact amount of money the taxpayer needs for their hardship, and the IRS will send the taxpayer that amount of money from the refund. The IRS can keep the rest of the refund.

Other Things to Know About IRS Offers in Compromise

Still, have more questions about what an IRS offer in compromise is?  Again, it's when the IRS agrees to let you settle your tax bill for less than you owe. This can happen if you can't afford to pay, it would be unfair to make you pay, or you don't really owe the tax bill. Here's a breakdown of some more details. 

How the IRS Decides Whether to Accept an Offer in Compromise

As explained above, there are different criteria for each type of offer in compromise. The IRS looks to see if you meet the criteria. Then, the agency decides whether or not to accept your offer. If the IRS thinks you can pay more, you legitimately owe the tax, and it would be fair to make you pay it, the agency probably won't accept your offer.

Offer in Compromise Acceptance Rates

The IRS rejects most offers. Only 30.7% of all offers were accepted in 2021. This means that the IRS rejected almost 70% of applications. Generally, you can only get approved if you have serious financial issues and you can't afford to pay more than your offer. 

There is no time in the recent past that the IRS has accepted more than half of the applications to this program. The highest acceptance rate was in 2016, and it was just 42.8%, meaning the agency rejected 57.2% of all applications. If you want to boost your chances of success, you should work with a tax professional who has experience with this program.  

Other Options: Alternatives to the OIC Program

If you don't qualify for an OIC, you should look into other options. The IRS has many different programs to help taxpayers get caught up on back taxes. Depending on your situation, you may want to look into the following programs:

• Hardship Status — If you can't afford to pay but you don't meet all of the offer in compromise criteria. 
• Innocent Spouse Relief — If the tax debt is due to your spouse or former spouse's actions and you didn't know that they understated or underpaid the tax or it would be unfair to hold you responsible for other reasons.
• Payment Plans — If you can afford to make monthly payments on your tax debt.
• Penalty Abatement — If you want to ask the IRS to remove penalties from your account. This can be used in conjunction with the other resolution options. 

When you contact a tax professional to talk about your account. They can help you determine which of these alternatives might be the best option for your situation. 

What Is an Offer in Compromise on State Taxes?

A state tax offer in compromise is when the state agrees to let you pay off your state taxes for less than you owe. Some states offer a version of an offer in compromise program similar to the IRS. Others have offers in compromise programs with different rules and requirements. Some states do not offer an offer in compromise at all. 

Each state agency has its own tax resolution solutions. Want to know if your state lets people settle taxes for less than they owe? Then, check out the links below. They have details on the resolution options for back taxes in each state.

• Arizona Offer in Compromise
• Arkansas Offer in Compromise
• California FTB Offer in Compromise
• Colorado Offer in Compromise
• Connecticut Offer in Compromise
• Georgia Offer in Compromise
• Illinois Offer in Compromise
• Indiana Offer in Compromise
• Iowa Offer in Compromise
• Maryland Offer in Compromise
• Massachusetts Offer in Compromise
• Michigan Offer in Compromise
• Minnesota Tax Compromise
• Mississippi Offer in Compromise
• Missouri Offer in Compromise
• New Jersey Closing Agreement
• New York Offer in Compromise
• North Carolina Offer in Compromise
• Ohio Offer in Compromise
• Oklahoma Offer in Compromise
• Pennsylvania Tax Forgiveness
• South Carolina Offer in Compromise
• Tennessee Offer in Compromise
• Wisconsin Offer in Compromise
• Virginia Offer in Compromise

Offer in Compromise Help – How OIC Tax Services Work

When you hire a tax professional to help you, they start by talking about your situation. They help you determine if you might qualify for this program, and if it looks likely, they help you apply. If this doesn't appear to be the ideal option for your situation, the tax professional will help you consider other options. 

When to Hire a Tax Expert to Help You

Wondering if you should hire a tax expert to help you apply for an offer? In most cases, the answer is yes, but if you're feeling brave, you can always try to submit the OIC application on your own. Here are some signs that you should consider calling a pro to help you.

• You have never applied for an offer in compromise in the past. Tax pros are experienced with this program. They deal with these applications on a regular basis and know how to complete them correctly.
• Your last offer was rejected. A tax pro can help you review your rejected application and help you decide how to apply again.
• You have a professional file your tax return. If you don't normally prepare your own tax returns, the paperwork required for this program might be too intense for you.
• You want to get the lowest offer possible. Again, a tax professional can help you find the Goldilocks spot. They can help you narrow in on an offer that is as low as possible for your budget but high enough to get accepted by the IRS. 
• You disagree with the tax bill. Arguing a disagreement with a tax liability can be tricky. Tax experts have intimate knowledge of the tax codes, and they use their knowledge to your advantage. 
• You're tired of dealing with the IRS. The IRS can be exhausting. When you hire a tax pro, they deal with the IRS on your behalf. 

Licensed professionals such as Enrolled Agents, CPAs, or Tax Attorneys can prepare all of the documents you need for an Offer in Compromise. They can help you negotiate a settlement where you pay less than you owe. If you are looking for a list of tax professionals with an offer in compromise experience, you can find experienced tax professionals here, or you can start your search below. 

Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney.