Once you’ve determined that the tax, interest, and penalty they are attempting is correct it’s time to see if you qualify for a penalty abatement. Most of my clients tell me that they can pay the tax and interest but the penalties are a killer. That can be 25 % of the tax for failure to file on time and even more for a failure to make timely tax deposits.
The IRS can abate (remove) a penalty for late filing if there is reasonable cause for the late filing of the return. Determine the reasons for the late filing and write them a letter giving the facts and circumstances which kept you from filing on time. Be as specific as possible. If you have any documents to support your request attach copies to the letter.
There are any number of reasons that will qualify for reasonable cause. Some of them that I’ve used are:
- Illness, either the taxpayer or a family member
- Death in the family
- The taxpayer or a family member in rehab
- Records lost or not available
- Traveling for business
- Prior tax practitioner did not complete the returns in time to file
- Disability of the taxpayer, either physical or mental
- Natural disasters
- Property damage to the home or business which caused a loss of records
- Marital infidelity on the part of the other spouse
All of these go to the state of mind of the taxpayer at the time the return was due. These, and many others, could cause a person to not be in the right state of mind at that time. It doesn’t mean you were crazy, just not necessarily thinking straight. Not having the money to pay the tax is not a reasonable cause to file a return late, but the underlying stress of not being able to pay just might be.
We’ve never tried the dog ate my homework but we guess the dog could eat the bank statements! Whatever you do, make sure you can document the reason you give. You don’t want to be asked for documentation and not have it. Don’t make something up. In all the penalty abatement requests I’ve written I don’t recall ever having to prove the reason for the request. But the next one I write could be the first.