The Real Deal On Interest & Penalties

February 6, 2013

Many of our clients ask about reducing penalties and interest. The IRS has very specific guidelines for when and to what extent they may abate penalties and interest.

Interest is rarely abated. Essentially, a taxpayer has to show that the IRS did something wrong before they will even consider abating interest. The IRS will not abate interest even if there is a showing of reasonable cause.

Penalty abatement is something different. The IRS will consider penalty relief if the taxpayer can establish that he or she acted with ordinary business care and prudence but nevertheless failed to comply with the tax law. Upon a review of all of the facts and circumstances, if the IRS determines that the taxpayer has established reasonable cause, penalties can be abated. Since it is a facts and circumstances analysis, it isn’t always black and white as to whether an abatement request will be accepted, but the IRS has given guidance as some reasons that might rise to the level of reasonable cause:

- Death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family
- Fire, casualty, natural disaster, or other disturbance
- The inability to obtain necessary records

These generally are not going to show reasonable cause:

- A mistake was made
- Reliance on another party to comply on the taxpayer’s behalf or that another party provided erroneous advice
- Ignorance of the law
- Forgetfulness or an oversight by the taxpayer, or another party

Everything is dependent on a review of the facts and circumstances. It’s possible that an inability to obtain necessary records would not be considered reasonable cause, while a mistake could be. It all comes down to the ordinary business care and prudence standard. It never hurts to ask for a penalty abatement, regardless of what the expected outcome may be, but the chances for success are going to be much better where facts are laid out that the taxpayer did as much as possible to comply with the tax laws.