by Dave Horwedel, CEO of Torchlight Tax.
Drowning in IRS penalties and interest and feeling like there’s no way out?
A lot of people think IRS penalties are carved in stone. They’re not. In many cases, there are legal ways to reduce or even eliminate your penalties — and sometimes the underlying tax — if you know what tools to use.
Let me quickly walk you through the main ways we help clients get rid of IRS penalties.
First, there’s First-Time Penalty Abatement.
Think of this as a “one-time break” from the IRS if you’ve otherwise been playing by the rules. If you have a clean compliance history for a recent period and you got hit with a penalty for filing late or paying late, we may be able to ask the IRS to remove those penalties just because it’s your first slip-up in a while.
The second major tool is Reasonable Cause Penalty Abatement.
This is where we explain to the IRS why it was actually reasonable, under your circumstances, that you filed or paid late. That could be a serious illness, a death in the family, natural disasters, relying on incorrect professional advice, or other events that a normal person would recognize as a genuine hardship or obstacle.
The key with reasonable cause is documentation and storytelling. We don’t just say, “I was sick.” We show the IRS what happened, when it happened, how you tried to comply, and why you couldn’t. Done correctly, reasonable cause can remove very large penalties.
Now, sometimes penalties are only part of the problem. The real issue is that the total balance — taxes, penalties, and interest — is just impossible for you to pay.
In those cases, we may look at an Offer in Compromise.
An Offer in Compromise is a legal program where the IRS can settle your total debt — including penalties and interest — for less than the full amount, if you qualify based on your income, assets, and expenses. You’re not just attacking the penalties here; you’re potentially cutting down the whole bill.
If you don’t qualify for an Offer in Compromise, another tool is a Partial Pay Installment Agreement.
This is a payment plan where your monthly payment is set so low that, based on the remaining collection time the IRS has, you will never pay the full amount before the statute runs out. In other words, you pay what you can afford each month, the clock keeps ticking, and whatever is left when the collection statute expires simply falls off.
The IRS generally has ten years from the date of assessment in which to collect on an IRS debt. See my video on the IRS Statute of Limitations on the Torchlight Tax YouTube channel for more information.
If your original return was wrong — maybe income was double-counted, deductions were missed, or filing status was incorrect — we can amend the tax return. When we reduce the tax, the penalties and interest that were based on that incorrect tax also go down. Sometimes, simply fixing the numbers through an amended return will dramatically reduce what you owe. In some cases, an Offer in Compromise based on doubt as to liability or a petition to Tax Court may also help to resolve this matter. See my videos on What Is an Offer in Compromise? and What Is Tax Court? for more details on these remedies.
If you’re facing IRS penalties and don’t know where to start, contact Torchlight Tax for a free consultation at 877-758-7797 or fill out a form here. We’ll look at your situation, see which penalty relief options apply to you, and build a strategy to get you the best possible outcome.
