This one-time strategy can waive IRS tax penalties. ‘It’s like a get out of jail free card,’ expert says

  • This lesser-known first-time penalty abatement may waive IRS fees in certain situations, tax pros say.
  • “It’s like a get out of jail free card,” said Rosemary Sereti, managing director of Deloitte Tax.
  • However, there are specific IRS guidelines to qualify for penalty relief.
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LAS VEGAS — If you received a tax penalty notice from the IRS, it’s possible to get the fees waived in certain situations, tax experts say.

The lesser-known first-time penalty abatement provides relief for otherwise compliant taxpayers.

“It’s like a get out of jail free card,” said Rosemary Sereti, managing director of Deloitte Tax and a former IRS senior executive. 

But “not every taxpayer qualifies,” she said, speaking at the American Institute of Certified Public Accountants’ annual conference, held in Las Vegas.

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Some of the common individual tax penalties may include failure to file, which is 5% of unpaid taxes per month (or a portion of the month) your return is late, up to 25%, or failure to pay for 0.5% monthly, capped at the same percentage. 

“Very frequently, these two penalties run together,” said Debra Estrem, managing director of private wealth controversy at Deloitte Tax, who also worked at the IRS Office of the Chief Counsel.

Another fee, the accuracy-related penalty, is typically assessed at 20% of the underpayment amount for cases of “negligence or disregard,” according to the IRS. In some cases, the fee can rise to 40%, Estrem said.

There’s also a high fee for civil fraud — “a whopping 75% penalty” — but the IRS has the “burden of proof” for those cases, she said.

How to qualify for IRS penalty relief

Three penalties may qualify for first-time abatement: failure to file, failure to pay and failure to deposit, according to the IRS. However, most taxpayers won’t qualify if they didn’t file a return, Sereti said.

The IRS also expects a history of tax compliance, including on-time filings, payments and no penalties. “You have to be a good taxpayer that made a one-time mistake,” she said, noting that you need a “clean record” for the past three years. You can see detailed IRS rules here.

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When you receive an IRS penalty notice, you can request a first-time abatement by following the letter’s instructions.

The fastest option is typically calling the phone number in the right corner of the notice to speak with the IRS. There’s also the option to send a written request by mail.

If approved, you’ll receive another notice with the penalty and interest removed. But if the IRS doesn’t grant your request, you can try to appeal the decision.

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