If you're facing financial hardship and have limited funds to pay IRS penalties, it's important not to ignore their notices. The IRS provides various programs and options to assist taxpayers in such situations, including penalty abatement, installment agreements, and temporary collection delays.
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The IRS can remove or reduce certain penalties if you show that you failed to pay due to a reasonable cause and not willful neglect.
What qualifies: Examples of reasonable cause include a serious illness or death in the immediate family, a natural disaster, or inability to access records. Lack of funds alone is generally not enough, but it can be considered alongside other facts and circumstances.
How to request: You can request this over the phone by calling the toll-free number on your IRS notice. Have the notice and any supporting documentation ready. If they cannot approve it over the phone, you can request it in writing using Form 843, Claim for Refund and Request for Abatement.
2. First-time penalty abatement (FTA)
If you have a good compliance history, you may qualify to have penalties for failure-to-file, failure-to-pay, or failure-to-deposit removed under the FTA program.
Qualifications:You must have filed all required returns, paid or arranged to pay all tax due, and have no prior penalties for the three tax years before the tax year you received the penalty.
How to request:You can request FTA by calling the number on your notice.
3. Offer in Compromise (OIC)
An OIC lets you settle your tax debt, including penalties and interest, for less than the full amount you owe.
Qualifications:This is an option if you have exhausted other payment options and can prove that paying the full amount would cause a financial hardship. The IRS reviews your ability to pay based on your income, expenses, and asset equity.
How to apply:Use the Offer in Compromise Pre-Qualifier Tool on the IRS website to see if you are eligible. If you are, you must file Form 656 and Form 433-A (individuals).
4. Currently Not Collectible (CNC) status
If the IRS determines that you are unable to pay any of your tax debt due to a financial hardship, it may temporarily delay collection by placing your account in "currently not collectible" status.
How it works:This pauses collection efforts, such as levies, but interest and penalties will continue to accrue.
How to request:You will need to provide detailed financial information to prove that collection would prevent you from affording basic living expenses.
Steps to take immediately
Regardless of the program you pursue, you should take these steps to prevent further penalties:
File your taxes:Even if you cannot pay, file your tax return on time to avoid the failure-to-file penalty, which is often much higher than the failure-to-pay penalty.
Pay what you can:Pay as much of the penalty as you can afford. This will reduce the amount of interest and penalties that continue to accrue.
Contact the IRS:If you received a notice, call the number on the notice immediately to discuss your situation.
Where to get help
Low Income Taxpayer Clinics (LITCs):These clinics provide free or low-cost assistance to taxpayers who have disputes with the IRS.
Taxpayer Advocate Service (TAS):This is an independent organization within the IRS that helps taxpayers resolve problems with the IRS.
Qualified tax professionals:A tax lawyer or Certified Public Accountant (CPA) can help you navigate the process, assess your options, and negotiate with the IRS on your behalf.
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