Penalties Are Negotiable
Most people do not know this, but IRS penalties are negotiable. The tax itself is the tax. But the penalties on top of the tax can often be reduced or eliminated entirely. On a $100,000 tax debt, the penalties can easily add $25,000 to $50,000. Getting those removed changes the entire picture.
Strategy 1: First Time Abatement
The IRS has an administrative waiver called first time abatement, or FTA. If you have a clean compliance history for the prior three years, meaning you filed all returns on time and paid all taxes or had no tax due, the IRS will remove the failure to file and failure to pay penalties for one tax period. No questions asked. No reasonable cause argument required.
This is free money that most people leave on the table because they do not know about it. I have removed tens of thousands of dollars in penalties using FTA alone.
Strategy 2: Reasonable Cause
If FTA does not apply, the next strategy is reasonable cause. The IRS will abate penalties if you can show that you exercised ordinary business care and prudence but were unable to comply due to circumstances beyond your control. Common reasonable cause arguments include serious illness, death of a family member, natural disaster, inability to obtain records, and reliance on the advice of a tax professional.
The key to a successful reasonable cause argument is specificity and documentation. Do not just say you were sick. Provide medical records showing hospitalization dates. Do not just say there was a flood. Provide FEMA disaster declaration information. The more specific and documented your argument, the more likely the IRS is to accept it.
Strategy 3: Statutory Exception
Certain penalties have statutory exceptions built into the Internal Revenue Code. For example, the estimated tax penalty can be waived if you retired or became disabled during the tax year. The accuracy-related penalty can be avoided if you had substantial authority for your position or disclosed the position on your return. A tax attorney identifies which statutory exceptions apply to your specific situation.