Tax Penalty Waiver: What You Need to Know! Internal Revenue Code Simplified

Tax Penalty Waiver: What You Need to Know! Internal Revenue Code Simplified

Millions of taxpayers are charged the estimated tax penalty every year by IRS. The estimated tax penalty is imposed when your tax payment is less than the estimated tax payments that the tax rule desires you to do. The most common sufferer from this penalty are people who are self-employed, retired, or who have investments or people who don’t withhold enough taxes from their paycheck. The good news is that IRC 6654(e)(3)(A) lays down if the failure to make the estimated tax payment was due to casualty, disaster, or other unusual circumstances, the estimated tax penalty may be waived.

Request a waiver at the time of filing the tax return

You can request a waiver when you file, complete IRS Form 2210 and submit it with your tax return.
You need to attach an explanation for why you didn’t pay estimated taxes and attach documentation that supports your statement.

It is a good exercise to review the Form 2210 instructions for the year you have an estimated tax penalty and see If you qualify for a penalty waiver. You can use Form 843 or a letter with a full explanation about why the IRS should not impose the estimated tax penalty. Do not forget to attach the supporting documentation.Requests for a waiver of the estimated tax penalty under IRC 6654(e)(3)(A) must be submitted in writing and signed by the taxpayer.

Waiver of the Estimated Tax Penalty Due to Law Change

Legislature keep in mind t provide relief when a retroactive tax consequence creates an estimated tax liability. A provision of law to waive to the extent that the estimated penalty is a direct result of the change in the law are also enacted.For example , visitIRC 6654(e)(3)(A) which is a waiver provision. In order to avail the waiver ,you need to satisfy the the Waiver Criteria Under IRC 6654(e)(3)(A) which are as under :

  1. Find the difference between the two tax computations- complete Form 2210 or Form 2210–F on the basis of the law in effect before the changes were made, and then do on the basis of the law in effect, after the changes were made. The penalty amount eligible for the waiver is the difference between the two computations.
  2. The taxpayer should attach an explanation showing his or her computation, the amount of penalty to be waived, and what caused the tax increase and related underpayment of estimated tax.
    1. The taxpayer’s failure to comply with the estimated tax requirements was due to casualty, disaster or other unusual circumstances, and not due to any other reason.
    2. Given all the facts, it would be against equity and good conscience to apply the penalty.Reminder: A recurring circumstance is not an unusual circumstance.

It must be noted that most of the penalty under Internal Revenue Code may not be imposed if the taxpayer convince the IRS with a “reasonable cause ” for the default. But the waiver provisions of IRC 6654(e)(3)(A) are not equivalent to reasonable cause, so a waiver of the estimated tax penalty under IRC 6654(e)(3)(A) is available only if the conditions given in the waiver law is met.

Examples of Situation for Waiver of Estimated Tax Penalty

The following examples of situations can give you idea how the penalty may be waived  if it is determined that imposition of the penalty would be against equity and good conscience:

  1. Serious Illness– The taxpayer becomes seriously ill or is seriously injured and is unable to manage his affairs.
  2. Records destroyed due to natural disasters-The taxpayer’s records are destroyed by fire or flood or other natural disaster. Please note, however, that in most instances of natural disaster, area wide guidance on conditions for waivers are issued, and waivers are automatically implemented via programming without taxpayer intervention. See IRM 20.1.3.2.7.2.1.
  3. Offset of tax payable without notice-The taxpayer designates that an overpayment of tax shown on a prior return is to be credited against estimated tax, but the overpayment is offset for either past-due child support or non-tax federal debt under IRC 6402(c), and the taxpayer is not notified of the offset before the due date of the estimated tax instalment.
  4. Due to filing of joint return-Taxpayers file a joint original return, then they file separate “amended” returns based on community property laws and the amended returns incorrectly suggest that one taxpayer was under-withheld.

When tax penalty waiver may not be granted ?

The tax penalty waiver may not be granted if the failure to pay estimated tax is due to any of the following:

  1. Reliance on the advice of a competent tax advisor.
  2. Retroactive application of a statute or regulation unless the statute or regulation specifically grants a waiver of the estimated tax penalty or the Service announces in the Internal Revenue Bulletin that such a waiver has been granted.
  3. Erroneous advice from the IRS unless such advice falls within the provisions of Treas Reg. 301.6404-3, and or within the provisions of IRC 6404(f), Abatement of Any Penalty or Addition to Tax Attributable to Erroneous Written Advice by the Internal Revenue Service.
  4. Lack of funds or when the lack of estimated tax payments points toward a lack of making any attempt to estimate the tax liability.
  5. The waiver also may not be granted if (based on the facts of the case) it would not be against equity and good conscience to assess the penalty. Generally speaking, it would not be against equity and good conscience to impose the penalty if either of the following apply:




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