Many people tell me that they could pay their back taxes over time if they didn’t have to pay the interest and penalties.  In general the answer is “no”, but is this sometimes possible to avoid the penalties and interest?  The answer depends on the type of deal you make with the IRS.

 

 

If you enter into an Installment Agreement, you will have to pay the accrued interest, which continues to accrue until the balance is paid in full, but the penalties might be forgiven if you have reasonable cause for being behind in payments.  However, the IRS will not consider your request for abatement of penalties until the underlying tax is paid.  What is a reasonable cause? It depends on each case, but I have had penalties abated for clients due to a death in the family, a nasty divorce, tax preparer mistakes, depending in the erroneous advice of others, etc.  The penalty abatement appeal is separate from the process of setting up the Installment Agreement.

If you file an Offer In Compromise and it is accepted, then your entire liability, i.e. taxes, interest and penalties, is considered paid in full for the lesser amount of the compromise; therefore, the issue of forgiving interest and/or penalties never arises.  For example, one might owe $100,000, which might include $50,000 in taxes, $30,000 in interest and $20,000 in penalties.  If the IRS accepts an Offer of $20,000 to settle the debt, then, in effect, the taxpayer pays no interest or penalties for that particular debt.