The Internal Revenue Service assessed 38.6 million penalties to taxpayers in 2011, totaling almost $31 billion, but will reward taxpayers with a history of compliant behavior with a one-time penalty amnesty.
Certain penalties can be waived or abated with a one-time penalty amnesty if the taxpayer meets the clean compliance criteria rules:
- Clean three-year penalty history. The taxpayer cannot have penalties of a “significant” amount assessed in the prior three years on the same type of tax return.
- Required returns filed. The taxpayer must have filed all tax returns for the past three years, as required.
For individuals, this relief applies to two of the most common penalties: failure to file (delinquency) and failure to pay. For businesses, this relief also applies to the failure-to-deposit penalty for payroll taxes.
Penalty relief is usually classified according to one of the following categories:
- Reasonable cause. The taxpayer who demonstrates that he or she did not fail to comply with the law due to willful neglect may have their penalty abated by the IRS. While reasonable cause abatement is on a case-by-case basis, circumstances beyond the taxpayer’s control (illness, natural disasters, destruction of taxpayer records) will be assessed.
- Statutory exceptions. Some specific exceptions are eligible for penalty abatement, including, but not limited to: tax less than $1,000; no tax liability in the preceding year; a taxpayer who is newly retired, disabled or in combat zones.
- Correction of an IRS error. For example, if the IRS incorrectly posted an extension to file, they would waive the penalty. This category can also include erroneous written or oral advice from the IRS that the taxpayer relied on using ordinary business care and prudence.
- Appeals nonassertion or relief due to hazards of litigation. Used primarily for accuracy-related penalties in Appeals proceedings involving audits.
- Administrative waiver. The IRS may formally interpret or clarify a provision to provide administrative relief from a penalty it would otherwise assess under specific conditions, such as financial hardship.
