Underpayment of Tax Penalty
Many people filing their upcoming Tax Return will encounter a penalty for underpayment of taxes. This is a penalty based on what you should have gotten paid into the IRS by year end, and what was actually sent. People who own businesses typically experience penalties due to underpayment of estimated taxes, whereas, W-2 employees will experience penalties because the amount withheld from their wages wasn’t enough.
Wage Under Withholdings
In 2022, this has been a common theme for many tax returns. If you didn’t fill out the IRS Form W4 from your employer, did so incorrectly, or had your employer drop the ball you are likely encountering a penalty that can amount to hundreds of dollars. You should immediately contact your company human resources or a tax accountant to ensure that your withholdings this year are appropriate. Next, you should seek a waiver of this penalty when certain instances of reasonable cause apply, and file IRS Form 2210.
Reasonable Cause
Many wage employees who relied on their company’s payroll department to ensure their wage withholds was appropriate may have a case for the waiver. For the last several years, withholding tables have been in favor of paying more into the system through each paycheck resulting in refunds. But, in recent taxpayers have been cutting checks to the IRS for taxes due.
First-Time Abatement – Failure to Pay, File, or Deposit
There are other situations where a First-time Abatement may get you out of a penalty. When the penalty is a result of failure to pay, file, or deposit. Being successful takes some effort, and planning.
Being Successful
In order to be successful in your request for abatement, you must show reasonable cause. Reasonable cause can be due to many factors. Health reasons including sickness, caring for a sick individual, or depression tend to be the most popular, but are not the only avenue. Other circumstances commonly arise like when an area is within a Natural Disaster Area.
Payment History
The IRS considers your tax filing & payment history and having a clean one makes your chances skyrocket. In fact, you must have filed & paid on time in the previous three years. Keep in mind that the abatement does not apply to an understatement of income or criminal penalty. So, if you forgot to report a W2 or missed $10,000 in business income you shouldn’t even waste your time trying to get out of it.
But will you only qualify for the First-time Abatement one time? No, in 2017 the IRS Office of General Council Clarification said that it is possible that the first-time abatement may be allowed multiple times for the same tax payer. Some of their qualifying conditions will include 3 years have passed with timely filed & paid tax returns. In theory, a tax payer could be approved for the first-time abatement every fourth year!
Get Started
After you have received the notice of penalty, and considered your reasonable cause, go ahead and call the IRS on the number they provide. You might wait on hold to speak with an agent, but give it a shot. If you get an agent feeling extra lenient, per their discretion they can waive that penalty right over the phone.
If that attempt is unsuccessful, try a letter requesting the abatement. Be sure to state all of your reasons of reasonable cause. If there are several situations or conditions that may apply be sure to list all of them. The end of the letter should state that you are requesting the abatement of the penalty due to the reasonable cause provided. Then, wait to hear back. In my experience, many attempts are successful at this step.
Abatement for Cause - Form 843
However, if you remain unsuccessful after sending a letter in direct response to the notice you may pursue abatement with the official penalty abatement Form 843. When filling out this form, I urge you to make citation of each relevant condition or situation that may meet the definition of reasonable cause under this authority.
It’s likely that the initial filing of the Form 843 will be unsuccessful. The best chance of receiving an abatement now is to appeal the ruling so that an appeals officer who can review the case. The reason that it is very important to have all of the potential reasonable causes cited is because once the Form 843 is filed the officer may consider no other citations that weren’t filed with the original Form 843.
Can’t Pay After Abatement?
If you would still be unable to pay the IRS after the abatement of the fee, you may want to consider an offer in compromise even before considering the request for abatement.
Offer In-Compromise
An offer-in compromise is a lot trickier. It includes two forms (Form 656 & 433-A OIC). The forms require detailed calculations, and you must provide required documents to prove your current financial condition. Start first with the 433-A OIC, which will set you up for filling out the Form 656 - Officer In-Compromise. You’ll want to settle-in because these things can take a year. First, you’ll pay 20% of the offer as a deposit, and the application fee of $205 when you submit. If you’re approved, you’ll only have 5 months to payoff the remaining balance of the offer, so make sure you’re able, or it will blow the whole deal.
If the Offer in Compromise is rejected, prepare Form 13711 the Request for Appeal of Offer in Compromise.
Installment Agreements
Taxpayers who want payment options may consider an installment agreement with IRS Form 9465. There is a $225 fee if you file by paper and pay with a check, but if the form is filed along with a direct debit of the payment then the fee goes down to $107. The maximum repayment term for the streamline agreement is 72 months. It’s usually a good idea to set the installment agreement up for a lower payment and pay more than setting up a higher payment with the IRS and running into payment issues.
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