Written by attorney Henry Daniel Lively

Are penalties and interest charged by the IRS negotiable?

A question that often comes up when a taxpayer has additional taxes due upon audit is whether the penalties charged by the IRS are negotiable. The answer to this question is absolutely. The first part of the negotiation is whether the penalty should be charged at all. If the taxpayer can show reasonable cause - such as reliance on the advice of counsel - it is possible that the penalty can be abated entirely.

In these tough economic times the IRS has tended to toughen up on many of the penalties that they routinely abated in the past. Therefore, you need to be prepared to document your position and explain why you deserve for your penalties to be abated. If you are not familar with this process it is a good idea to retain professional tax help. You may save more than it costs you in this area.

If you cannot get the IRS to abate the penalty in your negotiations the next step is to get them to give you a lesser level penalty. For example, change your penalty form a 75 percent fraud penalty to a lower penalty such as a negligence penalty. This could make a huge difference in terms of the overall dollar amount that you have to pay in penalties. Also, you cannot discharge fraud penalties in a bankruptcy.

Interest is another story. In most circumstances interest is never abated. The Service feels that you had use of the money while it was not paid and should not benefit from the interest you earned or could have earned. One exception is if the IRS unreasonably delayed your case. Interest can be ceased after six months of delay. Consult with a tax attorney if this happens to you.

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