Guide to IRS Penalty Abatement for Small Businesses

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Qualifying for IRS Penalty Abatement as a Small Business: Could This Be a Major Tax Mistake?

The IRS provides a valuable opportunity to avoid penalties after neglecting to file or pay taxes on time. On occasion, however, small business owners suspect that they’re actually better off paying the fine and skipping the process of determining their eligibility for abatement.

It’s best to know your options before you proceed. Below, we’ll explain how penalty abatement works and when various approaches are preferable.

Which Types of Penalty Abatement Are Available?

How you qualify for penalty abatement matters, as relief looks decidedly different based on why it’s granted. There are three main paths to penalty relief, outlined below:

  • Reasonable cause. Under this category, extraordinary circumstances such as natural disasters will have kept you from filing or paying taxes on time.
  • Statutory exemption. If the IRS provides incorrect advice, penalties assessed as a direct result of that advice may not need to be paid.
  • Administrative relief. Taxpayers with a strong history of paying on time can often qualify for administrative relief. This limited-time option may initially feel a bit like the tax version of a get-out-of-jail-free card but remember: it can still carry consequences.

When Is Penalty Abatement a Bad Idea?

At first glance, penalty relief seems like an excellent opportunity: get the IRS off your back while also avoiding added fees. In most cases, this is exactly how abatement functions. In certain situations, however, seeking abatement is not as good of a deal as it seems.

For example, penalty abatement may be worth avoiding if you intend to obtain an offer in compromise (OIC). Bankruptcy also occasionally comes into consideration, and, while it shouldn’t be pursued with the main intention of handling penalties, abatement is worth avoiding if the underlying tax debt is likely to be discharged.

Not sure if you qualify for IRS penalty abatement — or whether you should take advantage of this program? Insight from the Highland Tax Group can help you determine which strategies are best for your situation. Contact us today to get started.