What is a penalty abatement ?
The IRS charges millions of taxpayers the estimated tax underpayment penalty every year when they process tax returns and find that tax payment is less than the quarterly payable estimated tax payments. The most common sufferer of this penalty are people who are self-employed, retired, or who have investments or people who don’t withhold enough taxes from their paycheck. The good news is that IRC 6654(e)(3)(A) lays down that if the failure to make the estimated tax payment was due to casualty, disaster, or other unusual circumstances, IRS is authorized to waive the estimated tax underpayment penalty.
First try for penalty abatement through Form 2210
The best time to apply for waiver of estimated tax underpayment penalty is at the time of filing your tax return.So, it is an excellent exercise to review the Form 2210 instructions for the year you have an estimated tax penalty and see If you qualify for a penalty waiver. The form 2210 must be completed and attached with your tax return 1040. You must also explain why you didn’t pay estimated taxes and enclose documentary proof to support your statement.
What if return is already filed and you forgot to request vide Form 2210 ?
In that case ,you can use Form 843 or a letter explaining why the IRS should not impose the estimated tax underpayment penalty. Requests for a waiver of the estimated tax underpayment penalty under IRC 6654(e)(3)(A) must be submitted in writing and signed by the taxpayer. Basically , you can claim a tax refund of assessed taxes or to request abatement of penalties computed by the IRS which are prima facie erroneous. There is a time limit of filing the form 843 from the date when taxes were paid or three years from the date when the return was filed, whichever is later.
The First Time Abatement ( FTA ) is an administrative waiver that the IRS may grant to relieve taxpayers from failure-to-file, failure-to-pay and failure-to-deposit penalties if specific criteria are met. The policy behind this procedure is to reward taxpayers for having a clean compliance history; everyone is entitled to one mistake. Individuals and businesses may request FTA for any failure-to-file, failure-to-pay or failure-to-deposit penalty.
The First Time Abatement ( FTA )waiver rules do not apply to other types of penalties, such as the accuracy-related penalty, returns with an event-based filing
Waiver of the Estimated Tax Underpayment Penalty Due to Law Change
Legislature keeps in mind to provide relief when a retrospective tax consequence creates an estimated tax liability. For example, visit IRC 6654(e)(3)(A), which is a waiver provision. To avail of the waiver, you need to satisfy the waiver criteria under IRC 6654(e)(3)(A), which are as under :
- Find the difference between the two tax computations- complete Form 2210 or Form 2210–F based on the law in effect before the changes were made, and then do it based on the law in effect after the changes were made. The difference between the two computations is the penalty amount eligible for the waiver.
- The taxpayer should attach an explanation showing their computation, the amount of penalty to be waived, and what caused the tax increase and related underpayment of estimated tax.
- The taxpayer’s failure to comply with the estimated tax requirements was due to casualty, disaster or other unusual circumstances and not due to any other reason.
- Given all the facts, applying the penalty would be against equity and good conscience. In this regard, please note that a recurring circumstance is not an unusual circumstance.
Internal Revenue Code also provides a common ground for the non-imposition of penalties. That is, “reasonable cause ” for the default or non-compliance of the law. So, if the taxpayer convinces the IRS with a “reasonable cause” for the default, IRS may not levy a penalty.
But the waiver of estimated tax underpayment penalty under IRC 6654(e)(3)(A) is not similar to ” reasonable cause”.Therefore, IRS can waive the estimated tax underpayment penalty under IRC 6654(e)(3)(A) only if the conditions given therein are met.
Examples of Situation for Waiver of Estimated Tax Penalty
The following examples of situations can give you an idea of grounds that the IRS may consider good for waiving the penalty:
- Serious Illness– The taxpayer becomes seriously ill or is seriously injured and cannot manage his affairs.
- Records destroyed due to natural disasters- The taxpayer’s records are destroyed by fire, flood, or another natural disaster. Please note, however, that in most natural disasters, area-wide guidance on conditions for waivers is issued, and waivers are automatically implemented via programming without taxpayer intervention. See IRM 22.214.171.124.7.2.1.
- Offset of tax payable without notice-The taxpayer designates that an overpayment of tax shown on a prior return is to be credited against estimated tax. Still, the overpayment is offset for either past-due child support or non-tax federal debt under IRC 6402(c). The taxpayer is notified of the offset after the estimated tax instalment due date.
- Due to the filing of joint return-Taxpayers file an original joint return. They file separate “amended returns” based on community property laws, and the amended returns incorrectly suggest that one taxpayer was under-withheld.
When may tax penalty waiver not be granted?
The tax penalty waiver may not be granted if the failure to pay the estimated tax is due to any of the following:
- Failure to pay estimated tax was based on the advice of a competent tax advisor.
- Retroactive application of a statute or regulation unless the law or regulation explicitly grants a waiver of the estimated tax penalty or the Service announces in the Internal Revenue Bulletin that such a waiver has been granted.
- Erroneous advice from the IRS unless such advice falls within the provisions of Treas Reg. 301.6404-3. Or the advice falls within the provisions of IRC 6404(f), Abatement of Any Penalty or Addition to Tax Attributable to Erroneous Written Advice by the Internal Revenue Service.
- Lack of funds or when the lack of estimated tax payments points toward a lack of making any attempt to estimate the tax liability.
- The waiver also may only be granted if (based on the case facts) it is against equity and good conscience to assess the penalty.
How to request penalty waiver from IRS?
You can request penalty waiver by filing Form 2210 at the time of filing tax return itself.If you have already filed the return , you can still request for waiver of penalty by filing Form 843