IRS Law Blog

The IRS charged you penalties for not paying and filing your taxes, and you want relief. But is IRS penalty relief worth it?

After all, when you see how much the penalties have added to your bill, the logical next step would be to focus on having them removed.

It makes sense – the penalties can be aggravating, and you would like to see the IRS give you a break and ease your mind.

But asking for IRS penalty relief, or the removal of your penalties, may not help end your IRS problem.

Let’s begin by looking at how much late filing and not paying penalties can add to your bill:

• For filing late and not paying, the IRS can add up to 47.5% of the tax in penalties.
• So, if you owe the IRS $100,000, they can charge you $47,500 additional in penalties.  Your total bill will go from $100,000 to $147,500 on penalties alone.
• At $250,000 owed, your penalties can add $118,750 to your tab.  Your IRS balance will jump to $368,750 with the penalties.

Now, let’s consider how, or if, IRS penalty relief will change your result:

• Could you pay the IRS $100,000 in taxes if they agreed to forgive $47,500 in penalties?
• How about paying $250,000 in taxes if the IRS abated $118,750 in penalties?

If the answer is no – you cannot pay $100,000 or $250,000 back to the IRS, penalty abatement is not going to help.  Pursuing it will waste your time.  We don’t want that.

It doesn’t matter how much the IRS charges you in penalties if you still cannot pay the amount after the penalty is removed.  The IRS can charge you all the penalties in the world if you cannot pay them.

Also, it’s important to keep in mind that it is tricky to get penalties removed.  It is far from a sure thing.  We will need to give the IRS a good reason why you filed late and did not pay.  The IRS calls this “reasonable cause.”  Forgetting to file, procrastinating, or not having the money to pay is generally not considered reasonable cause.  Reasonable cause is best shown with a one-time occurrence beyond your control.  And the more years you owe, the harder it can be for the IRS to accept your reason.

But all is not lost.

If you cannot pay the IRS back, that is how your case should be approached.  Trying to prove “reasonable cause” so the IRS can abate your penalties will be futile.  At the end of the day, you will be in the same place:  with an IRS debt you cannot pay.

You cannot pay the penalties back.  You cannot pay the taxes back.  And the interest the IRS charges, while frustrating, cannot be paid either.  And that is okay.

Fortunately, the IRS offers options so you do not have repay the penalties, the taxes, and the interest.

To avoid the frustrations of penalty abatement getting you nowhere, here are five frequently used IRS collection policies to help you not pay them:

1.   Offer in compromise.

The IRS can agree to settle for what you can afford to pay, and forgive the taxes, penalties, and interest.   This is known as an offer in compromise.

An offer in compromise is based on your finances – what you make, spend, and the value of your assets.  If the IRS finds you will never be able to repay them, they can accept a compromise.

There is no minimum amount the IRS requires in settlement – if you owe $250,000, they can accept $5,000 to pay your taxes, penalties, and interest.

That’s better than penalty relief, resolving everything you owe all at once. Want to know when the best time is to file for an offer in compromise? Find out here!

2.   Collection statute of limitation expiration date. 

IRS gets 10 years to collect taxes, penalties, and interest.  After 10 years, your IRS debt will be forgiven – everything, including the penalties.

The IRS will tell us how much time they have left to collect the penalties from you.  And when the time expires, they will provide records showing the penalties (and taxes and interest) have been taken off your records.

You will be completely done with the IRS, no balance owed, no levies, no liens, with the IRS completely behind you.  A complete solution.

3.   Partial pay installment agreement.

You can enter into an installment agreement with the IRS that will never pay them back.   This is called a partial pay installment agreement.

Penalties do not need to be repaid in a partial pay installment agreement if you cannot afford to do so.

For example, you can get approved for a $100/month installment agreement on a $100,000 in taxes, penalties, and interest.  You will pay the IRS $1,200/year back until the collection statute expires.  If the IRS has three years left to collect, that’s $3,600 not only on the penalties, but the taxes and interest, too.  And then you will be done with the IRS.

4.   Currently not collectible status.

If you cannot afford an installment agreement, the IRS can place your account in currently not collectible status.

Currently not collectible status is an agreement with the IRS that you do not have to make any payments.  The IRS does not force payment on you if it would create a hardship.

That includes no payment of penalties.

And after the 10 year collection statute of limitation expires, the IRS will clear all taxes, interest, and penalties from your record.  Currently not collectible status can result in no payment back to the IRS.

5.  Bankruptcy.

If your taxes are old enough, bankruptcy can eliminate your penalties, and taxes and interest.

You should qualify for bankruptcy to wipe out what you owe the IRS if your debt is from income taxes on returns that are more than three years old.   Your returns also must have been filed more than two years before your bankruptcy.  Like the other collection options available to you, bankruptcy can clear your entire IRS debt, not just the penalties but the taxes and interest.

The penalties the IRS charges can get under your skin.  But you have good options if you are unable to pay the penalties.  The IRS can accept an offer in compromise to settle your entire debt, clear what you owe when the collection statute expires, put you in a partial pay installment agreement to repay only what you can afford, or mark your account as currently not collectible without requiring any payment.  Bankruptcy, too, is another complete solution to the IRS.

If you can’t pay what you owe the IRS, pursuit of penalty relief will lead you down a path of false hope and wasted time.  Don’t fall for it.  The IRS can have the penalties; what you can’t pay can’t hurt you.