Monday, April 20th 2020, 7:35 am
Originally Posted On: https://taxfortress.com/irs-penalty-relief/
It is possible for some taxpayers to reduce or eliminate their IRS tax penalties by obtaining an abatement of penalties. This article will explore the fundamentals of IRS penalties as well as how to go about getting them removed. Taxpayers with a state tax liability may also qualify for an abatement, depending on the state. Most states have abatement criteria that is similar to that of the IRS. However, the focus of this article will be IRS penalties and how to get them abated.
The IRS has four general categories in which penalty relief will be considered. These categories include reasonable cause, statutory exceptions, administrative waivers, and correction of an IRS error.
The most prevalent basis for abatement of penalties is reasonable cause and consequently will be the focus of this article. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations.
When determining if the taxpayer exercised ordinary business care and prudence, the IRS looks at four general categories.
Some of the most common events that give rise to reasonable cause are:
In addition to these common categories, a taxpayer may be able to establish reasonable cause for a variety of reasons by demonstrating that he or she exercised ordinary business care and prudence, but was nevertheless unable to comply.
Statutory, regulatory, or administrative penalty relief may be granted if the taxpayer relied on written or oral advice from the IRS, or advice from a tax professional. Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer’s responsibility to file, pay, or deposit taxes typically cannot be excused by reliance on the advice of a tax advisor.
As part of the administrative waiver, the IRS has a provision referred to as a first time abatement program. It allows for penalty relief provided that the taxpayer has not previously been assessed with a similar penalty for the previous three years. However, this type of penalty relief is only applicable to the first tax period in which a penalty has been assessed during the three year period in which no similar penalties had been assessed. Penalty relief for all subsequent tax periods must be based on the showing of reasonable cause (and absence of willful neglect).
When requesting penalty abatement, the burden of proving entitlement to relief is generally upon the taxpayer. To maximize the chances of obtaining a penalty abatement, I recommend composing a persuasive written proposal that presents the facts in a light that is favorable to the taxpayer, identifying the correct laws and IRS policies relative to the taxpayer’s specific facts and circumstances, applying the appropriate law to the facts, and then forcefully arguing that the law requires the IRS to abate penalties. If there are any documents that support the establishment of reasonable cause, those should be included with the abatement request. It may also be beneficial to include affidavits from individuals who can provide statements in support of reasonable cause. Whereas the preparation of a compelling penalty abatement request is similar to the preparation of a legal brief, I believe that tax attorneys (who have training and experience in persuasive legal writing) are better suited for securing penalty abatements than other tax professionals, such as CPA’s or Enrolled Agents.
When determining whether to hire a professional to seek an abatement of penalties on behalf of a taxpayer, one should consider the amount of penalties that could potentially be abated relative to the professional’s fee. For example, if there are $1,500 in penalties that could potentially be abated, it would not make sense to spend more than $1,500 on a professional (unless the professional will be providing services above and beyond a penalty abatement request for that fee). If you find yourself in this situation, you may wish to do your best to draft a compelling penalty abatement request on your own. After all, you have nothing to lose but your time, and you might succeed.
On the other hand, if the amount of penalties is large relative to the professional’s fee, it may make a lot of sense to have a professional prepare your request for you and pursue the approval of your request. However, I would steer clear of any professional who promises an abatement of penalties. Ultimately, the IRS, not your tax pro, decides whether or not reasonable cause has been established, and you have to have facts and circumstances that would help in establishing reasonable cause. A tax pro cannot change your past facts and circumstances, but a good one may be able to significantly improve your chances of convincing the IRS to abate your penalties.
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