Penalties and Interest

Penalties and Interest

Did you know the IRS has over 150 different types of penalties they can apply to your tax account? The key to removing penalties from an IRS account is demonstrating “Reasonable Cause” to the IRS. According to the Internal Revenue Manual, the IRS will find that a taxpayer had reasonable cause when the taxpayer “exercised ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations.”

The IRS has further explained several circumstances that would qualify as reasonable cause. They include:

  • Death, Serious Illness, or Unavoidable Absence
    • You or your spouse suffered a serious illness requiring your attention.
    • You were in rehab and attended to your taxes once you were clean.
    • You suffered from major depression and could not attend to your taxes.
    • You were incarcerated.
  • Fire, Casualty, Natural Disaster, or Other Disturbance
    • Your home was hit by a flood, hurricane or blizzard.
    • Your office suffered a fire that damaged or destroyed your business records.
  • Inability to Obtain Records
    • Your employer failed to provide you a W2 before your tax return was due.
    • Your bank failed to issue you a 1099 for interest income.
  • Inadvertent Mistake
    • You filed a timely tax return but later discovered an error and filed an amended return.
  • Erroneous Advice or Reliance
    • You relied on something the IRS told you, even though it was wrong.
  • Reasonable Ignorance of the Law
    • Because you are retired you have not made enough money to be required to file an income tax return in years. This year a chance in circumstance (the passing of a spouse or earning extra passive income) results in an obligation to file.
  • Financial Hardship
    • Assessing a particular penalty would result in the loss of your business.
    • You were in Bankruptcy when the taxes were due.

When penalties are removed from your account, the corresponding interest is also removed potentially saving you thousands on your IRS tax bill. Moreover, even if your situation doesn’t qualify as reasonable cause, you still might be eligible for a first time penalty abatement.

If you need assistance determining whether you are eligible for penalty abatement contact us online or call us at 401-324-9344 to make an appointment.

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