August 24


IRS Tax Penalty Relief and Offer in Compromise

By Staff

August 24, 2020

If you owe back taxes to the IRS, you will have to pay interest and possibly penalties and other charges, depending on the length of time you owe and the circumstances surrounding your IRS tax case.

There are times when you qualify for relief from penalties. This depends on whether you have tried to comply but could not meet your tax obligations, according to the guidelines set forth by the IRS.

You should not be the one speaking directly with the IRS just yet, if at all, without professional representation. Your first step is to make sure that the information outlined in the IRS letter is correct. Then contact your tax preparer. If you self-filed, it’s time to seek assistance from a CPA or tax attorney.

The IRS lists the following reasons they would consider eligibility for penalty relief as well as what the IRS looks at for reasonable cause to determine relevance.

Penalties eligible for penalty relief include:

  • Failing to file a tax return
  • Failing to pay on time
  • Failing to deposit certain taxes as required
  • Other penalties as determined

The IRS offers the following types of penalty relief based on:

  • Reasonable cause
  • Administrative Waiver and First Time Penalty Abatement, and
  • Statutory Exception

The IRS does not absolve interest for reasonable cause or as first-time relief. Interest is established by law. Interest is paid on the amount you owe as well as on the penalties assessed until you have paid in full. When penalties are reduced via payment, the related interest charges are also reduced. So, it’s in your best interest to act expeditiously and pay as quickly as financially possible.

The IRS does have a “First Time Penalty Abatement” policy, which could provide penalty reprieve. But to be accepted, you need to qualify under IRS guidelines. 

The First Time Penalty Abatement policy could kick-in if the following are applicable: a) you previously did not have to file a tax return, or you have no penalties for the three tax years before the tax year in which you received a penalty; b) you are current with you tax filings and extensions; c) you have paid or arranged to pay, any taxes you owe.

Interest will continue to accrue on the penalty you owe until the tax has been paid in full. It would be best if you discussed your options with your tax advisor. This is because it may be to your advantage to wait until after you pay what you owe in taxes before applying for relief. It shows ‘good intention’ to the IRS.

What are the circumstances for “Waiver of Interest and Fees”?

When you default on your taxes, by law, the IRS is limited to what it can forgive in penalties and interest. This includes self-employment income and unearned income. However, in some instances, the IRS can waive specific penalties and interest if a taxpayer meets certain conditions. Some of these include if someone living overseas did not know about the changes in the tax law and made errors in estimating income taxes due.

There are also cases where the IRS can forgive the taxpayer when there are extenuating circumstances beyond their control:

  • If you received written tax advice that contributed to the issue
  • The death, serious illness or unavoidable absence of a spouse or immediate family member
  • Having to relocate because of a natural disaster
  • Living at or below the poverty line
  • If a person just retired
  • If you are 62 years of age or older

A lack of funds is not a reasonable cause. However, the reasons for the lack of funds may meet reasonable clause criteria for failure-to-pay fine. This must be substantiated with documentation and written proofs.

A professional tax advisor such as a tax attorney can provide a review of your circumstances, and audit your returns, prepare the proper responses, submit the necessary documentation and act as your representative with the IRS. 

It is highly suggested not to engage directly in negotiations with the IRS or sign an agreement before speaking to a competent tax lawyer who can clearly explain what you are signing and what it will cost you, depending on what was resolved.

 You may not realize how much you will be paying in interest and penalties over the life of the payment plan. The IRS prefers a one-time lump sum payment but will allow a monthly payment similar to paying off credit card debt for up to 10 years.

The IRS will negotiate, but you probably will not like the outcome. Do not negotiate with the IRS or enter into an “Offer in Compromise” until after you speak to a professional tax expert. The consultation fee and how your tax attorney structures a settlement saves you tremendous headaches in the long run. Be careful of scams promising OIC’s because the IRS does not always accept them. An Offer in Compromise will not be given if you plan to declare bankruptcy.

Offer in Compromise (OIC)

An ‘Offer in Compromise (OIC)”, is the most amount of money the IRS can expect to collect from you in the shortest time period. The IRS does not like lengthened payment plans because people fail to pay the full amount owed.

Here is a possible “way out” if it applies to you. The IRS cannot collect on a debt for money owed at least ten years ago or more. Taxes could be forgiven because the IRS cannot legally collect on taxes due from such a long time ago. In some instances, bankruptcy will allow for the forgiveness of tax debts. If the Federal courts rule that your debt must be forgiven, the IRS cannot go after any future action against you to that extent.

Before you file your income tax return, make sure you know what you want. Otherwise, you could end up with a significant financial hardship, especially if the IRS decides you owe more money.

Advanced tax preparation is one of the best ways to ensure that you file your income tax returns on time. Waiting until the last minute can result in undue pressure, sleepless nights, costly mistakes, and the IRS reaching out to you.

Our exceptionally trained professionals handle the complex issues of tax law, the IRS tax code, and tax accounting services. Our expat tax experts can represent you in IRS proceedings and act on your behalf in all tax matters. If you would like to speak with us, contact us via our website at or call our US offices at (305) 600-5924.

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