trust fund recovery penalty abatement

Sometimes life just gets the best of you. Your taxes are withheld from every paycheck, but you do not file your tax returns. Sometimes you forget to pay your taxes on time as a self-employed worker. Sometimes you withhold payroll taxes but forget to deposit these monies with the Internal Revenue Service (IRS) on time … or you “borrowed” from those monies to pay important business expenses. It is not that you are deliberately “dogging” your tax obligation. It is just … life gets in the way.

The IRS can add interest and penalties to your tax obligation, making life a little rougher. The above situations are real life but can cause a lot of tax problems. Fortunately, the IRS has some helpful solutions. One such tax resolution is Penalty Abatement Relief. In the case of businesses, it is called Trust Fund Recovery Penalty Abatement or TFRP Abatement. The IRS offers this concession when life gets in the way of fulfilling tax obligations. They allow the penalties to be waived using three different types of penalty relief: 

  1. Reasonable Cause
  2. First-Time Penalty Abatement
  3. Statutory Exception

So, what are these relief options and how do they help with payroll tax and/or my tax debt? Let us discuss them one by one.

First, there is reasonable cause. As defined by the IRS, reasonable cause is based on circumstances and facts particular to your situation. You must establish that you followed all procedures to meet your tax obligations but were unable to meet them due to certain circumstances. According to the IRS, financial hardship does not make you eligible for a reasonable cause waiver; however, the circumstances leading to that financial hardship may. Some examples are natural disaster, fire, death, the inability to obtain records, serious illness or an unavoidable absence of a taxpayer or immediate family member.

Second, First-Time Penalty Abatement (FTA) rewards those who have typically met their tax obligations in the past but for whatever reason did not meet their tax obligations this time around. This type of abatement relief is offered to those who did not meet their tax obligation on a single return. The only other criteria are that you must not have received a penalty within the past three years on a specific type of tax return. So, to recap the eligibility for First-Time Abatement:

  • You have filed all current tax returns or have filed an extension of time to file a tax return.
  • You did not previously have to file a return.
  • You have arranged to pay all taxes due.
  • You have no penalties for the three tax years prior to the tax return in question that you received a penalty for.

Third, a statutory exception places the fault of your dilemma on the IRS itself. You asked the IRS advice and your received incorrect information which you acted upon and thereby received a penalty. You will have to prove this so have the following information at the ready:

  • Your written correspondence from the IRS for advice
  • The incorrect advice the IRS gave you.
  • The report of the penalty along with items related to this incorrect advice.

If indeed you are eligible for any of these waivers, the IRS will reduce or remove the penalties and therefore the interest charged will be reduced.

Before contacting the IRS on your own, consult a tax professional. A tax professional will determine what option applies to your situation and how to approach it. Our following blogs will continue to discuss tax resolutions. Stay tuned!

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