The criteria to reduce IRS penalties is very difficult to meet, and if you do not produce the correct information to the IRS so they consider your case for penalty abatement, you are not going to have success.
Typically, you need to show reasonable cause to be excluded from most IRS tax penalties. If you think that you qualify for an IRS penalty abatement, you typically must show that there were factors outside of your control that caused you to not pay your tax debts, or file returns on time. Some of these reasons could include; a life-threatening illness, natural disaster, death of a spouse or close family member.
Another way to reduce your penalty can occur if you have no prior history of tax problems with the IRS. The IRS often will lessen certain penalties, such as failing to file a tax return or failing to pay taxes on time, for taxpayers with a clean history with them.
This penalty abatement is done by using a waiver called the first-time penalty abatement request. This first time exception is not typically indicated by the IRS on its penalty-related notices, but can be used by taxpayers, and we have utilized it many times. For instance, we recently met with a client whose husband passed away in 2006. Our client hadn’t filed her federal income tax or state income tax from 2006 to 2011. We were able to approach the IRS and get them to eliminate penalties for 2006 due to the first time exception, and the remaining years for reasonable cause.
Hint: If you apply for an abatement of the penalties charged and the IRS accepts your application to eliminate the tax penalties, it is helpful to pay the tax liability in full so the penalties do not reaccrue.