You can avoid a penalty by filing accurate returns, paying your taxes before the due date, and providing informational returns in a timely manner. If you are unable to do so, you can request an extension to submit the request or a payment plan. Interest increases the amount you owe until you pay your balance in full. The best way to prevent interest from accruing is to pay the full tax bill.
But, if that's not possible, you have options. Unfortunately, the IRS cannot legally eliminate or reduce interest charges unless your underlying tax penalty is eliminated or reduced. On rare occasions, the IRS could eliminate interest that continued to accrue due to a delay or accumulation of arrears on its part. You can challenge the penalties and calculated interest by making a request for a reduction in penalties based on reasonable cause.
In short, you'll be asked to tell the IRS your story, including the circumstances that led to and during the accrual of the tax debt, and to request a reduction or elimination of the penalties. The reasonable cause reduction applies when circumstances beyond your control have prevented you from filing a return or paying the taxes you owe, leading to a penalty. You will be fined for not filing an IRS return when the IRS does not receive your tax return before the original tax deadline or the extension deadline. If there was an error or unreasonable delay caused by an IRS official or employer that generated additional interest, it can be eliminated.
So it's no surprise that people in this situation often ask the IRS to withdraw or reduce their interest. While this doesn't result in a real exemption or reduction in penalties or interest, it is an opportunity to apply to the IRS for what is essentially a tax settlement. You may qualify for penalty relief if you tried to comply with tax laws but were unable to do so due to circumstances beyond your control. The IRS won't eliminate interest most of the time, but if you're proactive, you can minimize interest on your own.
Penalties for not filing a return usually accrue at a rate of 5% of the total amount due for each month the return is delayed, up to 5 months, with a maximum fine of 25%. Once the IRS establishes that there is an outstanding balance, penalties and interest begin to accrue and continue to accrue throughout the collection process for as long as the balance exists. Penalties for not making adequate estimated tax payments begin to accrue at the time the payment should have been made, not when a year-end return is filed. Reasonable cause means that you “used all ordinary business care to meet your tax obligations, but you were unable to do so and received a fine from the IRS.
You can eliminate or reduce an accuracy-related IRS fine by demonstrating that the underestimation was accidental and not deliberate or intentional. You could qualify for a legal exception if your IRS sanction was due to erroneous written advice from the IRS itself. You can eliminate or reduce an IRS penalty for non-payment by showing that your unpaid tax balance was due to a reasonable cause, such as a natural disaster or serious illness. An IRS penalty for non-payment will be imposed on you when you have not paid taxes after the tax deadline or the approved extension deadline.