Penalty and Interest Reduction by the IRS: Harder Than Many Make it Sound
Our clients often ask: Will the IRS reduce penalties and interest? The answer is yes on penalties, but only on the first year that you owe in most cases. Almost never on interest.
Reducing IRS Penalties
The IRS will typically give you a first-time penalty abatement based on prior compliance for the first year you owe if you owe a series of years of tax debt This is given that there are no other tax penalties assessed on the three prior years, even if it was paid off. If a client qualifies for an Offer in Compromise, that is also a reduction in interest and penalties, but many will not qualify for an Offer.
An example where the IRS will reduce penalties:
- You owe on 2010, 2011, and 2012.
- You have never had a tax debt in 2009, 2008, or 2007.
- IRS will give the first-time abatement in 2010, based on the fact you were compliant for the three years prior to that.
An example where the IRS will not reduce penalties and interest:
- You owe on 2010, 2011, and 2012.
- You had debt in 2008 that accrued some penalties, but you paid it off.
- The IRS will not abate the penalties owed in 2010.
Penalty abatements can be approved for reasonable cause, but these are difficult to get passed. Many companies that have unlicensed tax consultants in their consultation make it sound easy to get a penalty abatement. We tell clients not to rely on getting penalty abatement.
Will The IRS Reduce Interest?
Only if they make an error. The IRS takes off interest on those penalties that are abated. IRS errors do happen on interest but are not that common.
With an Offer in Compromise, pennies on the dollar is possible.
Other Ways Penalties and Interest Can Be Reduced
Although not penalty abatements, an Offer in Compromise is the best way to try and reduce your overall tax balance, penalties and interest included. If tax returns are unfiled and the IRS has done them for you, most of the time filing these will reduce the penalties and interest. If the tax years are old they may be expiring tax debts and filing would add time for the IRS to collect.
Each case is different. To get the best option going forward, consult with a tax attorney. We offer a free, confidential, no-obligation consultation for anyone with over $20,000 in tax debt. Fill out our form to call you back here or call us at (888) 515-4829.
