If you really do owe unpaid taxes, there's generally not much you can do about the taxes or interest - you'll have to pay up. However, you can likely get some, if not all, of the penalty and interest abated. IRS penalties often do not apply when you acted in good faith, based on a reasonable cause for your actions. Penalties apply only if you deliberately attempted to cheat, deceive or mislead the IRS.

Immediately pay the tax and interest you owe and fill out IRS Form 843. Above the word "Claim" on this form, enter in "Demand for Abatement of Penalties under Code Section 6404(a)." When you return Form 843, include a detailed explanation of why your penalty should be canceled.

Your letter should lay out the facts so the IRS will evaluate that you acted in good faith and based on reasonable cause for your actions. You should spell out in black and white that you never deliberately set out to break the law.

This form is used a lot these days since a growing number of tax preparers are emerging with limited training—and these folks can and do make mistakes when calculating tax returns. Luckily, as long as you acted in good faith and didn't deliberately try to violate the IRS' rules, the penalties should get waived.

Sometimes the most crushing aspect of a tax bill can be the added interest charge. If you could earn that kind of return on your investments you'd never have to work again! If any of us charged those kinds of rates, we might end up behind bars!

Straight Talk Tip : Interest can be canceled. The 1988 Taxpayer's Bill of Rights Act guarantees you the right to cancel interest assessments under certain circumstances.

Three conditions lead to cancellation of interest:

• When the interest is due to an error made by the IRS;
• When the interest is due to delay caused exclusively by the IRS; or
• When the interest is demanded on money which the IRS sent in error.

To cancel interest, write a letter that states, “Interest should be canceled because” and list which condition the cancellation of interest meets. Be specific and demand cancellation. Mail your letter to the Service Center which issued the bill.

Smart Money Move: Send all correspondence with the IRS, including your tax return, via certified mail, with return receipt requested. This way you have tangible proof that your letter or return was both mailed by you and received by the IRS.

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