If you owe the tax, does the IRS ever negotiate on interest or penalties?
You were checking your mail after you got home from work when you noticed a letter from the IRS. It was a notice saying that you had an underpayment of tax and you owed an additional $2,500 in tax plus more money on top of that in interest and penalties. Now your heart is pounding, and you don’t know what to do. You take a deep breath and find your records only to realize that you forgot to include income from a 1099 you received, and you do actually have an underpayment of tax.
Now what? Is there any way to negotiate the amount down?
IRS First Time Penalty Abatement Policy
While receiving a notice from the IRS is never good news, there is a program you can take advantage of to have the penalties waived. The IRS has a First Time Penalty Abatement program under which it will waive penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due if you meet the following 3 requirements:
You didn’t previously have to file a return, or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
You filed all currently required returns or filed an extension of time to file.
You have paid, or arranged to pay, any tax due.
How to take advantage of this policy
In part, it will depend on whether you can fully pay the balance of the tax due.
If you can’t pay the tax all at once, call the toll-free number on your notice to set up a payment plan for the tax due. If you are unable to pay the tax all at once, the IRS advises that it may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the IRS’s first time penalty abatement policy. See the full article here.
If you plan to submit the underpayment of tax in full, you can send a letter to the IRS with the payment and request the penalty abatement. Here is some sample language that may be helpful:
I respectfully request administrative relief under the First Time Penalty Abatement policy for the penalties associated with the notice I received for an underpayment in calculating my 20[XX] federal income tax liability. I qualify for this relief because I have filed returns and had no penalties for the 3 tax years prior to 20[XX], I have timely filed all currently required returns, and I am enclosing [$_________] to pay the underpayment of tax due. I respectfully request that the penalty be waived, and the interest recalculated to exclude the portion of the interest associated with the penalties. Once the interest is recalculated to exclude the portion related to the waived penalties, I will submit the interest due.
So, what’s the deal with the interest?
It is the IRS’s policy not to waive interest. But the interest calculation is on both the tax and penalties. If the IRS waives the penalty, then the interest calculation should change to reflect interest is only being charged on the tax due. That’s why the above language asks for the portion of the interest related to the penalty to be waived.
Keep your receipts
Remember, it is always a good idea to keep a copy of any written correspondence you exchange with the IRS for your records! The best practice would be to send any written correspondence certified mail, return receipt requested. In layman’s terms, get a green card.
Questions?
If you have questions or need help, contact Addie Prewitt today.
GENERAL PURPOSE INFORMATION ONLY
This document is for general informational purposes only and may not constitute the most up-to-date legal information. This document is not legal advice and does not create an attorney-client relationship between the reader or user and Addie Prewitt Law.