Tax FAQs: When Can You Use IRS One Time Forgiveness?

May 15, 2020

If you feel you have been blindsided by a penalty from the IRS and you are unable to pay based on circumstances beyond your control, you may qualify for IRS one-time forgiveness. Despite the agency’s reputation, the IRS often works with taxpayers in disadvantageous circumstances to alleviate undue tax burdens. There are three primary types of relief offered by the IRS: reasonable cause, administrative wavier and first-time penalty abatement, and statutory exception.

Check Your Notice

Whenever the IRS assesses a penalty on a taxpayer, they send a standard notice to the home of that taxpayer. Before you succumb to despair regarding the money you apparently owe, be sure to review the notice carefully and check all the information against your tax return and the documents you used to complete your tax return. Occasionally, the IRS makes an error that you can easily resolve by sending the agency a letter or an email.

If you committed an error on your tax return which led to the penalty, notify the IRS and file an amended return to resolve the discrepancy. Regardless of whether an error occurred, keep your IRS notice. It will be the first of several documents you should keep track of while communicated with the IRS.

Types of IRS One Time Forgiveness

Before you open the lines of communication with the IRS, you should know which type of relief you likely qualify for and what documentation you may need to provide in order to substantiate your claim. Fortunately, the categories and their parameters are fairly straightforward.

Reasonable Cause

Taxpayers who have done everything in their power to meet their federal tax responsibilities but are still unable to do so for reasons beyond their control may qualify for tax relief based on reasonable cause. The most common situations resulting in reasonable cause relief are either Acts of God or health-related. 

If a fire destroys your home, business, or the records essential to your tax situation, you may qualify for reasonable cause forgiveness. Similarly, if you or a close family member were to pass away, the IRS would take into account the fatality in reference to your family’s tax situation.

We would be remiss not to note that health-related forgiveness is not limited to death. Many taxpayers qualify for relief based on onerous medical expenses which render their personal finances impotent in reference to any tax burden. The IRS does not ignore situations of this variety.

The Importance of Documentation

You must remember that a lack of funds alone is not a sufficient condition to qualify for relief. You must be able to document the effect of the Act of God and establish “you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.” This requirement can be difficult to meet if don’t have the necessary paperwork.

For instance, if your brick and mortar business were to be destroyed by an earthquake, you would need to provide documentation from the relevant authority, likely the police or the fire department, showing your business was rendered inoperable in addition to documentation demonstrating you were actively attempting to pay your federal taxes both before and after the incident. 

This being the case, it is always best to retain records from government agencies and healthcare institutions alongside your personal financial records.

Administrative Waiver and First Time Penalty Abatement

The first time penalty abatement policy is in place for taxpayers who experienced an unprecedented disruption in their tax situation which brought unpredictable tax debts to the fore. To qualify for relief based on this policy, you must have not been previously required to file a return or have not incurred a penalty in the last three years, have filed all presently required returns have, and have paid or arranged to pay any debts to the IRS.

In plain English, this means if you have been in good standing with the IRS and rectified any issues that previously arose, the IRS will be willing to work with you to find a solution to an unlikely problem. 

For example, if your uncle passed away, left you $100,000 in his will, and mandated a massive funeral described in that same will, you would have to claim that $100,000 as income and pay for your uncle’s lavish funeral, rendering you incapable of paying the tax burden on the $100,000 in income. The IRS takes these circumstances into account provided you can furnish the documentation.

Pay When You Are Able

If you are financially able, it may be beneficial to pay off your debt before you apply for relief based on the first time penalty abatement policy. This is true because the failure-to-pay penalty accrues while your claim is processing and you may be required to pay the failure-to-pay penalty, even if your claim against the original penalty is approved. By paying the debt before you make a claim, you risk nothing and you may get all that money back.

Statutory Exception

Relief based on statutory exception is specifically for taxpayers who have received incorrect advice from the IRS. More specifically, you must have requested advice from the IRS, received correspondence in reference to your request, and acted upon that advice in such a way that you incurred a tax penalty.

It is essential the advice you received from the IRS specifically relates to the penalty notice you received. Without a direct connection between those two documents, your claim will have tenuous traction.

As is the case with every type of IRS one time forgiveness, you must have all the relevant documentation in order to substantiate your claim. Therefore, it is important to keep every piece of correspondence you receive from the IRS. It would also be wise to keep a copy of any correspondence you send to the IRS. Even if your claim is not dependent on your own correspondence, it may accelerate processing time.

A Brief Note on Interest

When a taxpayer has an IRS penalty forgiven, that does not necessarily mean the interest on that penalty is also forgiven. In cases where the penalty has been outstanding for some time, this can be a considerable sum.

For this reason, it is always advisable to resolve any complications resulting from a tax return as quickly as possible. If you have the financial resources, you should also pay the penalty even if you believe it will be forgiven. This practice insulates you from any risk.

It’s also important to consider the possibility of partial forgiveness. The IRS may find that some portion of your penalty is excusable while another segment of the same penalty remains appropriate. In cases like this, you are responsible for the penalty and any interest accrued while your claim was processing. Yet another reason to pay immediately, no matter how ridiculous the notice seems.

Conclusion

When you receive a penalty notice from the IRS, don’t panic. Look through the notice carefully and verify all the relevant information. If you have reason to believe the penalty is legitimate after a review of your tax documentation, contact Geaux Tax Resolution. You may be eligible for IRS one time forgiveness.

If a natural disaster, a fire, an untimely death, or an inaccurate piece of advice has put you in a difficult financial situation, the IRS may be sympathetic. For better or for worse, the IRS’s sympathy is only available to those with all the relevant documentation. So, keep your financial records. More of them than you think you need.