What is a Penalty Abatement?

A penalty abatement is a type of tax resolution tool that makes it possible to temporarily halt the accrual of additional penalties and fees associated with an outstanding tax debt. Typically, an tax abatement can be obtained if the circumstances surrounding the current debt include events that the tax agency believes could affect the outcome of further investigation into the reasons why there is an outstanding balance due. Most local and national tax agencies have at least some provisions for the issuing of a penalty abatement, although many taxpayers are unaware that these provisions exist.

While the regulations regarding the issuance of a penalty abatement vary from one tax agency to another, there are three situations that may result in receiving this type of temporary halt on the accrual of fees and penalties. One has to do with a death in the immediate family. Should the agency determine that the death has created a sufficient level of turmoil within the household that it is not possible to focus on the tax issue for a period of time, the abatement prevents the application of penalties for a defined period of time.

A penalty abatement may also be granted if there is evidence of some sort of administrative error on the part of the tax agency that either delayed the processing of the original return or in some other manner affected the accurate assessment of taxes. In this scenario, the abatement remains in place until the tax agency resolves the issue and has either confirmed the veracity of the amount originally claimed to be due, or has adjusted the taxpayer’s account to reflect a revised amount of taxes due.

There are also some instances in which a penalty abatement may be granted if there is some evidence that the taxpayer filed the return based on outdated or incorrect information provided by a tax practitioner. Here, the assumption is that the taxpayer acted in good faith, utilizing information supplied by an expert. If the tax agency can determine that the inaccurate advice was obtained from a qualified third party, the abatement may be granted as a means of waiving penalties and late fees, provided the taxpayer files an amended return that is accurate and pays the balance due within a specified period of time.

In order to determine if a penalty abatement is possible in a given situation, taxpayers should work closely with representatives of the tax agency. Representatives can help taxpayers understand their rights in regard to qualifying for this type of abatement, and what responsibilities that assume in return for receiving the temporary halt on penalties. In many cases, the abatement provides a window of time to clear up any miscommunication and allow the tax issue to be resolved to the satisfaction of everyone concerned.