Taxpayers with tax debt soon learn that the actual amount of tax they originally owed the IRS or State is only a part of the amount they now owe overall. The balance may be much larger due to the assessment of penalties and interest. Although many find it shocking, it is not uncommon to balances that have increased by as much as 50% because of penalties and interest.

One of the larger penalties is the “Accuracy Related IRS Penalty”. This large fee is generally 20% of any portion of a tax underpayment which the IRS determines is attributable to one of the following:

1. Disregard or negligence of IRS rules and regulations

2. A substantial understatement of IRS income tax due

3. A substantial valuation misstatement covered under Chapter 1 of the Internal Revenue Code

4. A substantial overstatement of a pension liability

5. A substantial estate or gift tax valuation understatement

When is this penalty assessed? Taxpayers who have gone through an audit often incur an “accuracy related penalty.” Most often this penalty is the result of an audit where it was determined that there was a substantial underpayment of the taxes due at the time of filing.

This is one of the reasons that an IRS Audit can be so intimidating and worrisome. Taxpayers fear not only the tax debt itself but the very significant addition of the penalties and interest.

In these situations, hiring a professional tax settlement firm should be strongly considered. The problem with having significant amounts of tax debt is that outstanding tax debt issues are usually owed to both the IRS and state tax boards for multiple years. Unpaid tax debts resulting in the assessment of the “accuracy-related penalty” are generally also assessed underpayment penalties and multiple other penalties and fees. As if that wasn’t enough, until they are paid in full, all of these balances continue to accrue interest.

Unfortunately these situations can continue to snowball until they are so large and difficult to solve that they require a thorough examination of all tax settlement options, especially for taxpayers that are already in a poor financial situation. There is hope though. A qualified and reputable tax resolution firm can help you determine if you are eligible for IRS penalty abatement. If you are a candidate, it is possible to request an IRS penalty abatement of the assessed “accuracy-related penalty.”

To file this penalty abatement request, the taxpayer must be prepared to demonstrate that the taxpayer “acted in good faith and has reasonable cause”. The determination of whether a taxpayer acted with “reasonable cause” and in “good faith” is made by the IRS on a case-by-case basis. Hiring the right professional to ensure you have a solid case becomes very important as the IRS will take into account all specific facts and circumstances. Probably the most important factor the IRS considers is the extent of the taxpayer’s effort to report the proper tax liability.

If a taxpayer did not keep adequate books and records, they may have a very difficult time claiming to have acted with “reasonable care”. However, a taxpayer who has honestly relied upon the advice of a tax professional, and who has made a “reasonable effort” to assess their IRS tax debt liability, will have a better case even if the advice they received turned out to be incorrect. An honest misunderstanding of fact or law may also be considered “reasonable cause and in good faith” if the IRS feels the misunderstanding is reasonable.

Of course, simply requesting the abatement is not enough and just because you previously relied upon the advice of another or you had an honest misunderstanding of the tax law does not necessarily demonstrate to the IRS that you had “reasonable cause and good faith”. This is why the IRS looks at all of the facts and circumstances when considering a taxpayers request for tax debt penalty abatement.

Talk with your professional tax resolution specialist as it relates to your specific circumstances. Carefully consider all of your tax debt settlement options such as requesting an IRS penalty abatement, entering into an installment agreement, submitting an offer in compromise, and various other alternatives.

Remember, the problem won’t go away, it only compounds so the worst option is to do nothing.

Our licensed experts at Professional Tax Resolution (www.professionaltaxresolution.com) can assist you in determining which tax settlement options are appropriate for you based not only on your tax debt but your financial circumstances as well.