Follow the instructions in the IRS notice you received. Some requests for penalty relief may be accepted over the phone. Tax penalties can be negotiated, reduced, or even completely eliminated in some cases. There are several IRS programs that can be used when you have significant tax penalties and want some type of relief.
Taxpayers can apply for penalty relief. If they don't file or pay a penalty, taxpayers can request that the IRS “reduce penalties.” The reduction simply consists of eliminating the fines once they have been imposed on the taxpayer. Penalties for non-filing (FTF) and non-payment (FTP) generally require a reduction because the IRS evaluates them electronically (through its computer systems) when a return is filed or a transaction is made with the balance due. There are more than 150 different IRS penalties for late filing, late payment, return errors and other activities that don't comply with the rules.
This usually results in them paying fines that are significantly greater than what they would have paid if they had at least filed the return. Penalties for the Foreign Bank Account Report (FBAR) are imposed when a taxpayer who should have filed an FBAR fails to do so. Taxpayers who want to request a reduction in penalties for the FTF and FTP should follow a few simple rules to increase their chances of success. You can use first-time penalty relief (FTA) if you haven't had any tax penalties in the three years prior to the year in question.
Keep in mind that, even with an agreed payment plan, penalties and interest accrue until the balance of back taxes is paid in full. These “OIC” factories attract desperate and frightened delinquent taxpayers with the false assurance that they will negotiate the best possible offer with the IRS after charging a fee for their services. However, for two of the most common IRS penalties, you can get compensation if you follow a few simple rules for requesting and securing the reduction. If you apply for an OIC and it's rejected, you can appeal the decision, but in the meantime, penalties and interest will accrue on the amount you owe.
If you use the new offshore outreach program, you should consider how the FBAR penalties are calculated. Keep in mind that a temporary delay in collection will cause your tax debt to increase because you will be charged penalties and interest until you pay the full amount. You may be eligible for certain penalties to be eliminated or reduced if you acted with reasonable cause and in good faith. These include penalties for accuracy or fraud and generally require the taxpayer to consult with auditors or IRS appeals officers before evaluating the penalty.
The victims of these factories sometimes discover, years later, that their offer has been rejected and that they continue to owe accumulated fines and interest, Caplan says.