When does the IRS forgive Penalties and Interest?

First, let me wish everyone a Happy Valentines Day.  Many people who owe taxes more than five or six years old find that the interest and penalties are more than the original tax.  This is because penalties keep being added for several years until they max out.  In fact there are more than 170 penalties the IRS can charge.

 

 

In addition, the IRS compounds interest daily, and the interest keeps being added until the tax is paid.  Unfortunately, the only time the IRS will forgive interest is when the tax assessment which gives rise to the interest was incorrect initially.  Therefore, if the taxpayer does not dispute that the tax is owed, the interest will not be forgiven.

Penalties are a different matter.  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, etc.  In addition, the taxpayer must show that he acted reasonably under the circumstances.  If he can meet these two tests, the IRS will usually forgive the penalties charged.