IRS Penalty and Interest Abatements

Let me first address interest abatement.  There is only one instance when the IRS will abate interest.  That is when the IRS has either charged a tax it should not have or miscalculated the amount due on a tax.  In other words, interest will only be abated when the IRS has made a mistake in assessing the tax.

Therefore, if the taxpayer does not dispute that the tax is owed, the interest will not be forgiven.  Since the IRS compounds interest daily, the interest adds up very quickly.

The IRS is more lenient with penalties.  Many different penalties can be added to your tax bill for any given period.  The two most common are the failure to file and the failure to pay penalties.  The failure to file penalty is 5% of the amount due for each month you are late up to a maximum of 25% of the amount due.  The failure to pay penalty is 0.5% of the amount due for each month you do not pay up to a maximum of 25% of the amount due.  Thus, the penalties increase the longer you do not file or do not pay the tax. In fact there are more than 170 penalties the IRS can levy.

Many times the IRS will forgive penalties if the taxpayer can show reasonable cause for the tax being delinquent.  This usually means that something occurred that was out of the taxpayer’s control, such as a hurricane destroying records, serious illness, a nasty divorce, drug addiction, etc.  Generally, arguing that a “bad economy” caused the failure will not be enough.  In addition to the reasonable cause, the taxpayer must show that he acted reasonably under the circumstances.  If the IRS believes the failure to file or pay was in any way deliberate, the penalties will not be abated.