🚩 Red Flag | Relief Edition! | TaxGPT's Newsletter

With the passing of the September deadline, and the October deadline looming over us, let's take a look at what forms of relief are available for taxpayers.

1. Penalty Relief

a. First-Time Penalty Abatement (FTA)

• What It Covers: The IRS offers FTA relief for failure-to-file, failure-to-pay, and failure-to-deposit penalties.
• Qualifications:
  • No penalties for the prior three tax years.
  • All tax returns are filed (or valid extension requests).
  • Taxes are either fully paid or have an approved payment plan in place.
• Procedure:
  • Call the IRS or submit a written request (can be done online for certain penalties).
  • Use Form 843 (Claim for Refund and Request for Abatement) if requesting in writing.
• What It Doesn't Cover: FTA does not cover interest or other penalties like accuracy-related penalties.

b. Reasonable Cause

• What It Covers: Failure-to-file, failure-to-pay, or failure-to-deposit penalties.
• Qualifications:
  • The taxpayer must demonstrate that the failure to comply was due to circumstances beyond their control (e.g., natural disasters, serious illness, death, or incorrect written advice from the IRS).
  • Proof of reasonable cause is necessary, such as medical records, death certificates, or insurance documents.
• Procedure:
  • Submit a written statement explaining the reasonable cause along with supporting documentation.
  • File Form 843 (Claim for Refund and Request for Abatement).
• What It Doesn’t Cover: Typically doesn’t abate interest, as interest is charged by law unless specific provisions apply (e.g., disaster relief).

c. Statutory Exception

• What It Covers: Penalties resulting from erroneous written advice from the IRS.
• Qualifications:
  • The taxpayer must have followed IRS guidance that was incorrect and have proof (such as letters from the IRS).
• Procedure:
  • File Form 843 with documentation that proves reliance on erroneous written advice.
• What It Doesn’t Cover: Interest and other penalties unrelated to erroneous advice.

2. Installment Agreements

• What It Covers: Allows payment of individual or business taxes over time, including income tax, employment tax, and other liabilities.
• Qualifications:
  • Must be unable to pay taxes in full.
  • The IRS generally offers different installment agreements based on the amount of debt (e.g., short-term for under $50,000 and long-term for higher debts).
• Procedure:
  • Apply online (for debts under $50,000) or submit Form 9465 (Installment Agreement Request).
  • May need to provide financial information depending on the amount owed.
  • Once approved, penalties and interest will continue to accrue but at a lower rate for penalties (typically reduced from 0.5% to 0.25% for failure-to-pay).
• What It Doesn’t Cover: Interest continues to accrue.

3. Offer in Compromise (OIC)

• What It Covers: A settlement for less than the full amount of tax liability, including income tax, business tax, or payroll tax.
• Qualifications:
  • The taxpayer must demonstrate inability to pay the full tax liability or have a legitimate dispute about the amount owed.
  • Factors considered include income, expenses, assets, and ability to pay.
• Procedure:
  • Submit Form 656 (Offer in Compromise) and Form 433-A (Collection Information Statement for Individuals) or 433-B (for businesses).
  • Pay an application fee unless applying under low-income certification.
  • IRS will review and may request additional documentation.
• What It Doesn’t Cover: The taxpayer must continue to comply with all tax laws for the next five years or the agreement can be revoked.

4. Currently Not Collectible (CNC) Status

• What It Covers: Temporary relief from tax collection due to financial hardship.
• Qualifications:
  • The taxpayer must show that paying taxes would prevent them from meeting necessary living expenses.
  • The IRS will review the taxpayer's financial situation, including income, expenses, and assets.
• Procedure:
  • Submit Form 433-A or 433-B, which details the financial situation.
  • The IRS may place the account in CNC status if the financial review supports the request.
  • Penalties and interest will continue to accrue during this period.
• What It Doesn’t Cover: This status is temporary, and IRS collection efforts may resume if financial circumstances improve.

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5. Innocent Spouse Relief

• What It Covers: Relief from joint liability on a tax return filed jointly with a spouse or former spouse.
• Qualifications:
  • The taxpayer must prove they were unaware of erroneous items on the tax return, such as unreported income or inflated deductions.
  • The IRS offers three types of innocent spouse relief: traditional innocent spouse relief, separation of liability, and equitable relief.
• Procedure:
  • Submit Form 8857 (Request for Innocent Spouse Relief).
  • Provide documentation supporting the claim of innocent spouse.
  • The IRS will contact the other spouse (or former spouse) as part of the review process.
• What It Doesn’t Cover: Relief applies only to the taxpayer who can demonstrate innocence regarding the tax liability.

6. Taxpayer Advocate Service (TAS)

• What It Covers: Helps taxpayers who are experiencing significant financial difficulties due to tax issues or feel they have not received a fair outcome from the IRS.
• Qualifications:
  • Financial hardship or difficulty resolving a tax issue through normal channels.
• Procedure:
  • Submit Form 911 (Request for Taxpayer Advocate Assistance).
  • Explain the nature of the hardship or issue with the IRS.
• What It Doesn’t Cover: TAS cannot overturn tax law but can assist in resolving procedural or administrative issues.

7. Disaster Relief

• What It Covers: Extensions of filing and payment deadlines and relief from penalties for taxpayers affected by federally declared disasters.
• Qualifications:
  • Taxpayers must be located in a federally declared disaster area.
  • The IRS generally issues announcements regarding specific relief measures for affected areas.
• Procedure:
  • No specific forms are needed for initial relief; the IRS automatically identifies affected taxpayers based on their address.
  • However, if the taxpayer was not located in the area but was affected (e.g., books and records are with a tax preparer in a disaster area), they may request disaster relief through a written statement or by contacting the IRS.
• What It Doesn’t Cover: Does not abate interest unless otherwise specifically provided by IRS relief notices.

8. Interest Abatement

• What It Covers: In limited circumstances, the IRS may abate interest if the delay in paying taxes was due to IRS errors or delays.
• Qualifications:
  • The taxpayer must show that the interest accrued due to IRS errors or delays in performing ministerial or managerial acts.
• Procedure:
  • Submit Form 843 with a detailed explanation of the situation and supporting evidence.
  • The IRS will review to determine if interest can be reduced.
• What It Doesn’t Cover: Interest is generally statutory, so abatement is rare and only granted in cases involving IRS fault.

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