Many people who owe the IRS feel as if they might be able to deal with the tax they owe but the ever-increasing interest and penalties make them feel like they will never make any headway. One of the questions most asked is: "If I offer to pay all the tax, will that just forgive the interest and penalties?". Unfortunately, it does not work that way. Legally, the IRS is just as entitled to the interest and penalties as they are the tax. Therefore, when your account is in collection, they do not distinguish among tax, interest and penalties.

There are three ways to reduce or eliminate interest and penalties. The first is by reducing the amount of underlying tax. Since interest and penalties are predicated on the amount of unpaid tax, if you reduce the tax, the interest and penalties will be reduced proportionately. So if your argument is about the underlying tax, there is nothing additional to be done to reduce the interest and penalties.

The second way is as part of an agreement to settle the entire liability through an Offer in Compromise. The penalty and interest are not reduced per se. If an Offer is accepted, the tax, interest and penalty are eliminated in exchange for the amount offered.

The third way to reduce interest and penalties is by requesting an abatement of them.

Abating IRS Interest

You might be surprised to learn that the interest rate the IRS charges individuals on underpayments has only ranged between three and eight percent the last five years and, as of the first quarter of 2011, it is at a historical low of three percent. Even though it is compounded daily, IRS interest is not the reason your IRS debt is growing so rapidly.

The IRS lists seven categories in which your ‘reasonable cause' can fall into. Another term for ‘reasonable cause' is a good reason.

• Civil disturbance
• Serious illness of either you or a family member
• Death of a family member or yourself
• Unavoidable absence
• Lack of funds – only after you have shown you were using ordinary care and prudence in your business operations
• Reasons beyond your control that caused the inability to determine your tax
• Other reasons for not complying within the time limit. You still must show the IRS that you exercised ordinary business care, however.

You also may request a penalty abatement when you rely on incorrect advice given by the IRS over the phone. As a result of relying on the IRS phone advice, you suffered more taxes and penalties, for instance. Your reliance upon the advice, however, must be reasonable. You must show the IRS this.

Abating IRS Penalties