Running a small business comes with its fair share of challenges, and managing taxes is often one of the most daunting tasks. Jane, the owner of a small bakery in the Loop, experienced this firsthand.
Juggling multiple tasks simultaneously, Jane missed the April 15th tax filing deadline. When she finally checked her mail, she was greeted with a hefty failure-to-file penalty from the IRS. Overwhelmed and stressed, Jane feared this mistake could jeopardize her business’s future.
Fortunately, Jane’s friend, an accountant, told her about the IRS First-Time Penalty Abatement (FTA) program, commonly known as One Time Forgiveness.
In this blog, we will explore what IRS One Time Forgiveness is, how it can help small business owners like you and Jane, and the steps you need to take to apply.
What is one-time forgiveness?
Did you know that the IRS doesn’t actually have a program called ‘one-time forgiveness’?
This term, “one-time forgiveness,” is catchy and used by tax relief companies to draw in people overwhelmed by tax debt, making it sound like a simple fix.
One-time forgiveness refers to something called “first-time penalty abatement”, which the IRS offers as a break for taxpayers who slip up for the first time.
It’s only for people who’ve made a genuine mistake—maybe you filed late or paid your taxes late because of an honest oversight. If this is your first time, the IRS may let you off the hook for the penalty.
So, if you’re usually good with your taxes but just messed up once, this could be your chance to wipe the slate clean. However, FTA only applies to penalties and not to the underlying tax debt or interest, which can still accumulate. To put it simply, it’s not a way to wipe out your tax bill entirely, but it can ease the penalty part if you qualify.
How to seek one-time forgiveness
There are three ways you can qualify for one-time forgiveness of penalties from the IRS. Whether you’re an individual taxpayer or a business owner, understanding these options can save you from unnecessary financial stress.
1. First-time penalty abatement
This is a key relief program offered by the IRS to help cover penalties for first-time offenses. It’s your opportunity to explain any reasonable cause you had for not filing or paying on time. Surprisingly, only 12% of such penalties were abated in 2019, largely because many eligible taxpayers aren’t even aware that this relief is an option.
To qualify for this abatement, you must meet the following criteria:
- All required tax returns must be filed.
- Any outstanding taxes must be paid, or you should have an installment arrangement in place with the IRS.
- You should have no penalties for the past three years.
If you can, it’s wise to settle any owed taxes before applying for relief. This is because the failure-to-pay penalty continues to grow until the tax is paid off. Taking care of your tax debt first can prevent these penalties from stacking up and give you a clearer path to successful penalty relief.
2. Reasonable cause for penalty relief
If first-time penalty abatement doesn’t fit your situation, you might still have a chance to get your penalties waived by the IRS through a “reasonable cause” request. This option is there for those who faced genuine obstacles that prevented them from meeting their tax obligations.
Here are some scenarios that the IRS might consider as reasonable causes:
- Significant disasters such as fire, flood, or other natural events that impacted your ability to manage tax matters.
- Difficulty in obtaining necessary records to complete your tax return.
- Severe illness, incapacitation, or a death in the immediate family that directly affected your capacity to handle your tax responsibilities.
- Despite exercising ordinary business care and prudence, you were unable to meet your federal tax obligations.
However, just stating you didn’t have enough funds won’t suffice for relief under reasonable cause. It’s crucial to back up your claims with solid evidence. This could include:
- Hospital or court records, or a doctor’s note verifying illness or incapacitation.
- A death certificate if a family bereavement caused a delay in filing.
- Official reports from fire departments or police if a disaster like a fire destroyed your business documentation.
For instance, if a fire devastated your business and delayed your tax filing, you would need to provide the date of the fire, any related incidents thereafter, and official documentation from responding authorities. Similarly, if dealing with a health or family issue, documentation like a death certificate or medical records will be necessary.
Keeping a thorough record of all communications with the IRS and any relevant documents is also wise, as these will be invaluable in making your case for reasonable cause. This approach ensures that you’re prepared to demonstrate convincingly why you deserve relief from penalties. Keep in mind that “reasonable cause” is assessed case-by-case by the IRS. It’s not guaranteed, even with documentation.
3. Statutory exception for penalty relief
Another option for penalty relief is the statutory exception, applicable if you acted on incorrect written advice from the IRS. To take this route, you’ll need to submit a Form 843, Claim for Refund and Request for Abatement. This form should detail your initial inquiry for advice, the inaccurate guidance you received, and the tax or penalty consequences you faced due to following this advice.
It’s critical to gather and organize all relevant documentation to support your claim. This includes:
- The original request for advice sent to the IRS.
- The incorrect written advice you received.
- Any related financial statements or records showing the impact of following the IRS’s advice.
Make sure you keep copies of all correspondence with the IRS, as these documents are crucial for validating your claim.
How to apply for one-time forgiveness
Applying for one-time forgiveness, or first-time penalty abatement, might seem daunting, but it’s manageable with the right guidance. Consider consulting a tax professional like a CPA, tax attorney, or an enrolled agent. These experts have a track record of successfully negotiating abatements and can effectively handle the IRS on your behalf, increasing your chances of a favorable outcome.
Here’s how you can request penalty abatement from the IRS:
Written request: Draft a letter to the IRS explaining why you believe your penalties should be waived. Include any supporting documents that substantiate your case and send it to the address listed on your tax due notice.
IRS Form 843: For a more formal request, fill out IRS Form 843 (Claim for Refund and Request for Abatement). You’ll need to provide detailed information about yourself, the penalty in question, and the reasons for your abatement request. Attach your written explanation and any relevant documents to this form.
Phone or in-person: If you prefer direct communication, you can also request abatement verbally by calling the IRS or visiting a local Taxpayer Assistance Center. Be prepared to provide documentation to support your request during the call or meeting.
Navigating this process with a tax professional can streamline your application and improve your likelihood of success.
How much can you save with one-time forgiveness?
The amount you can save through penalty forgiveness can be substantial—ranging from a few thousand to tens of thousands of dollars, depending on the penalties accrued on your account.
Most IRS penalties are calculated as a percentage of your owed taxes, with rates varying from 1% to as much as 100% of your tax bill. Naturally, the greater your owed amount, the more significant your potential savings through penalty forgiveness.
Consider this scenario: Suppose you file your tax return a year late with a tax liability of $10,000. In this case, you’d face a failure-to-file penalty, which accumulates at 4.5% per month for the first five months. Additionally, a failure-to-pay penalty of 0.5% per month would apply until it caps at 25% of your balance.
This means you would accrue a failure-to-file penalty of $2,250 and a failure-to-pay penalty of $600, bringing your total payable amount to $12,850, plus any accrued interest. With penalty abatement, your bill could potentially be reduced back down to the original $10,000 (plus interest), offering significant savings and reducing the financial burden imposed by late filing and payment.
The bottom line
The IRS’s First-Time Penalty Abatement can be a lifesaver for business owners facing penalties for the first time. However, no tax relief option will be effective if your books aren’t in order. Accurate bookkeeping is crucial for ensuring that your tax filings are correct, your deductions are maximized, and you meet all IRS requirements.
At CoCountant, we not only assist with tax advisory and penalty abatement applications but also ensure that your financial records are accurate and up to date with our expert bookkeeping services. Our bookkeeping solutions lay the groundwork for a strong financial foundation, enabling our tax experts to help you navigate complex IRS issues with confidence.
Let CoCountant take the burden off your shoulders by managing both your books and taxes so that you can focus on running and growing your business.
