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One of the most common questions I get has to do with reducing interest and penalties on IRS accounts. I am adamant about correcting the myths, lies, and half-truths perpetuated by unlicensed tax resolution salespeople, and reducing IRS penalties is one of the least understood and overrated by salespeople in our industry.

First of all, let’s get this out of the way: There is no reasonable cause interest reduction application process within the IRS. It just doesn’t exist, period. If someone tells you that you can reduce your interest, they are directly lying to you and you should seek help elsewhere.

There are two, and precisely two, cases in which interest is reduced:

  1. Any IRS employee gives you false information, on which you acted and resulted in the interest. This is one of the reasons why all correspondence from the Internal Revenue Service (IRS) must be done and followed up in writing.
  2. Since interest is calculated based on tax liability, if an amended return is filed and the tax itself is reduced, interest is also reduced.

Now, let’s move on to the penalties. The IRS collects dozens of different types of penalties, but the three we most commonly talk about are the late filing penalty, the late payment penalty, and the penalty for not making federal tax deposits. These three penalties combined can add a whopping 65% to your total IRS bill. If your tax debt is more than two years old, you have maxed out all of these penalties, and therefore more than half of your total debt is penalties.

The IRS actually has a compassionate side, and is generally in the process of reducing penalties. Requests for reduced fines can also be appealed if they are initially denied, so you can always get a second set of eyes on the matter. The thing to keep in mind is that the IRS has very strict guidelines for granting penalty reductions, and these guidelines are called “reasonable cause criteria.”

It should be noted up front that “we didn’t have the money” is NOT a reasonable cause criterion. A drop in revenue, by itself, is not a sufficient argument for a penalty. Any request for a sentence reduction simply citing the economic downturn will be denied immediately.

Why is this? Here’s the IRS logic: You earned the money, and you should have paid taxes on that money at that time. If you are self-employed and you get a check, then you HAD the money, you just didn’t give the IRS your share. The same is true for payroll taxes, particularly trust fund taxes (money you withhold from employee paychecks for income taxes and Medicare / Social Security) – if you had an expectation of paying a certain amount of salary, so in theory, I HAD the money somewhere to pay that. person, and should have withheld and turned it over to the IRS. If you couldn’t cover the taxes, you shouldn’t have had the employee and you should have fired people or cut their hours.

There is it so ways to argue around this, and we’ve done it very successfully, but there has to be some other circumstance. For example, you had the money to pay the tax, but paying the tax instead would have created “undue hardship.” Examples could include a large medical expense that, unpaid, would have left a condition untreated, or a court-ordered payment that would have had other legal consequences, or a bill such as a large car repair that would have rendered you unable to work and resulted in Loss of work. These arguments are difficult to formulate and require much more work than standard requests for reasonable cause criteria, but they CAN be won, especially in the appeals process.

The IRS Reasonable Cause Criteria for Primary Sentence Reduction focus on natural disasters, loss or destruction of vital business records, poor advice from the IRS or an accounting professional, criminal activity, medical issues, substance abuse issues, and others. serious circumstances.

A couple of years ago I developed a standard list of questions to ask clients to help me prepare for the fine reduction. This list of questions should be given serious thought before requesting penalty reduction, as you are more likely to get what you want if you cover one of these areas:

  • Were business records lost or destroyed?
  • Were there circumstances that led to a substantial drop in the collection of accounts receivable?
  • Was there a transition in the business that led to non-payment of taxes?
  • Was there a death or serious illness that directly affected business or personal wages?
  • Was there embezzlement, theft of valuable property, or identity theft?
  • Were there any drug or alcohol abuse problems that affected the business or ability to earn a salary?

    Was there a natural disaster that affected you or your business?

    Did you rely on the advice of a CPA or IRS employee to make tax decisions?

  • Were there any circumstances that created substantial financial difficulties, to the point where your business was close to bankruptcy?

These questions cover all of the IRS reasonable cause criteria to one degree or another, so finding an answer to your personal or business situation that covers one or more of these questions is the key to a successful penalty reduction application.

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