Reasons the IRS will remove penalties
If certain criteria are met, the IRS can grant a first-time penalty waiver (FTA) waiver to taxpayers who fail to file, fail to pay, or fail-to deposit penalties. This procedure rewards taxpayers who have a clean compliance record. Everyone is entitled to one error.
FTA may be requested by individuals and businesses for failure to file, failure to pay, or failure to deposit penalties. FTA does not apply to any other penalties, such as the accuracy penalty, returns with an event-based filing requirement, Forms 706 and 709, or information reporting that relies on other filings.
How Does Tax Forgiveness Work?
Refer to IRM20.1.1.3.6, Reasonable Cause Assistant (RCA), and IRM20.1.1.3.3.2.1 First Abate (FTA),.
The following criteria are required for taxpayers to be eligible for an FTA waiver:
Compliance: You must have filed all required returns (or extended the deadline for filing them) and you can't have any outstanding requests for returns from the IRS.
Payment compliance - Must have paid all taxes due (can be made in installments if they are current).
Clear penalty history: There have been no previous penalties (other than a possible tax penalty) in the three preceding years.
Please note that IRM 20.1.1.3, Guidelines for Relief from Penalties, penalties relief under administrative Waivers, including FTA, must be taken into consideration and applied before reasonable cause.
Phone to request penalty abatement
If the tax practitioner is not being assigned to a particular compliance unit (examination or collection), he or she may call the IRS Practitioner Priority Service line (PPS) at 866.860.4259 and request FTA. To request FTA, the practitioner should contact the unit that is handling the case. To request penalty abatement over the telephone, a tax practitioner will need to have the power of attorney authorization (Form 2848 - Power of Attorney and Declaration Of Representative). The IRS representative who answers the call should have the ability to pull up the client's accounts, determine whether the FTA criteria are satisfied, and apply for the waiver. A letter would be sent to the taxpayer indicating that penalties have been removed based on FTA criteria. It is recommended that the taxpayer follow up with the IRS if the letter does not arrive within 30 days of the date of the call.
Tip Often, calling the IRS to request FTA is the best way to do so. Many penalties can be quickly removed during a phone call. Sometimes, however, the IRS may not be able to reduce the penalty amount over the telephone. To request FTA, the tax practitioner can write to the IRS. It is also advisable to send a letter to IRS to confirm that the IRS has abated penalties by phone. This letter should include the date, agent's name, and identification number.
Send a letter or mail to request a penalty reduction
A tax practitioner can request FTA for his client by writing to the IRS instead of calling the IRS. All relevant information should be included in the request, including taxpayer name, identification number, and tax year/period. It is important to clearly state that the client meets FTA criteria. Attach transcripts from clients that can prove compliance with filing/payment requirements and a clean history of penalties (Form 2848). All pages sent to IRS must include page numbers, the taxpayer's name, and the last four digits of their identification number.
How To get tax relief?
FTA is only applicable to one tax year/period. FTA does not apply to requests for penalty relief for multiple tax years/periods. If the FTA criteria are met, penalty relief will only be granted for the first tax year/period. All subsequent tax years/periods are subject to penalty relief based on other provisions such as reasonable cause criteria.
If the IRS has not assessed the penalty, then a client may file a late return and fail-to-file or failure-to-pay penalties will apply. The taxpayer can attach a penalty request nonassertion to the late-filed returns.
To request a refund, a client who has already paid the penalty may file Form 843 (Claim for Refund or Request for Abatement) to request a refund.
Consider appealing to the Appeals if the IRS refuses to grant penalty relief. The appeals may reach a different conclusion based on other factors such as the risks of litigation.
Although each case is unique, the CPA (client advocate), cannot request abatement for the client. With a simple telephone call or letter to IRS, clients can save thousands on penalties and rely on their tax professional for assistance.
The IRS will owe any amount. What makes it worse is that they can add penalties to the amount due. The IRS will slap you on the wrist for not paying the full amount due. They want to encourage you to use the "stick" approach rather than the "carrot".
Would you believe that your tax penalties could be wiped out? An IRS tax abatement can be applied for. It is not easy, so I cannot guarantee it will work. However, it is worth the effort. Some of my clients have experienced great success, so why not try it?
To be eligible for penalty abatement, the IRS has strict guidelines that taxpayers must follow. Many reasons could be considered for penalty abatement. These include honest mistakes, serious illness, and undue hardship. You should have documentation to support your claim.
Continue reading to find out more about the types of situations that the IRS will accept for a penalty reduction and to see if you fall within any of these categories. I can help you determine if you have a case.
WHY DOES THE IRS ADD PENALTIES TO PERSONS?
As we have already stated, the purpose (or imposing) a penalty was to encourage voluntary compliance. "Voluntary compliance is when taxpayers comply with the law without compulsion, threat or retribution" (IRS.gov "20.1.1.2.1 Encouraging voluntary Compliance," 8/14/2013). When a taxpayer makes good faith efforts to comply with all tax obligations ("Encouraging Voluntary Compliance"), he or she supports the principles of the Internal Revenue Code.
In this situation, the taxpayer is considered compliant if they reply to tax rules written material and complete all forms related to their tax liability. The IRS administers a system that penalizes taxpayers for not complying with tax rules ("Encouraging Voluntary Compliance") to encourage compliance. To encourage compliance in the future, the IRS educates taxpayers.
REASONABLE CAUSE
The IRS will waive or abate any applicable penalty if a taxpayer explains. "Part 20" states that if the explanation applies to any (or all) of the penalties but not all penalties, the IRS waives or abates the relevant penalty.
After the assessment of the penalty has been made, relief may be granted. The appropriate penalty portion is then reduced. There are specific guidelines for adjustments made due to reasonable cause.
Section 20.1.1.3.2 defines reasonable reason in the context of a taxpayer not complying with their tax obligations. The taxpayer is granted relief if the taxpayer "exercised normal business care and prudence when determining their tax obligations." (IRS.gov "20.1.1.3.2 Reasonable Cause," 8/14/2013).
These circumstances are known as "Reasonable Cause", and relief is often granted. The penalty sections of the Internal Revenue Code define reasonable cause as evidence that the taxpayer "acted in good faith" or that the taxpayer's failure to comply with the law was not due to negligence ("Reasonable Cause”).
A taxpayer can have reasonable cause if they have shown that their conduct is justifiable for non-assertion of or abatement. Each case is judged separately; the judgments are made based on the presented evidence, facts, and circumstances.
The specific criterion used by the IRS to determine taxpayers' guilt is used when evaluating the merits. The IRS may ask a question about the taxpayer's attempts to comply with the law after all facts have changed.
This question is one of five that the IRS uses to assess the taxpayer's decision-making ability to determine if "circumstances prohibited the taxpayer from filing a return, paying tax, or otherwise complying with the law" ("Reasonable cause").
The Internal Revenue Manual describes how reasonable cause and other relief provisions can be applied in the context of tax administration. These provisions must be used consistently and should comply with the IRC, Treasury Regulations(Treas) requirements. Regs. Regs.
Not all penalties are eligible for reasonable cause relief. A reasonable cause provision might only apply to a particular section of the Internal Revenue Code. Acceptable explanations do not have to be limited to the sections of the Internal Revenue Manual.
Penalty relief is usually considered when the facts and circumstances reveal that the taxpayer exercised ordinary commercial care and prudence, even though it was not possible to comply within a specified time frame. Once the facts and circumstances show that the taxpayer willfully failed to comply with tax obligations, reasonable cause ceases ("Reasonable Cause")
TAX Penalty ABATEMENTS-REASONABLE CAUSE FACTORS
Many of my clients get upset and take it personally when they are assessed a tax penalty by the IRS.
A balance owing to the IRS can be significantly increased by tax penalties. This is in addition to interest. It can make a small amount seem much bigger. The IRS uses a strict approach to tax penalties. They will often assess penalties without considering the underlying circumstances.
A list of reasons
For some taxpayers, the IRS may be able to reduce their tax penalty.
It is difficult to accept tax penalty abatements as the IRS doesn't like to release them without a justifiable reason. The Internal Revenue Manual has a list of "reasonable causes" that taxpayers can use to challenge their tax penalty.
The IRS defines a tax penalty exemption as a taxpayer who exercises ordinary care and prudential but fails to follow their obligations. [1] I have provided a list of reasonable causes exceptions to tax penalties for the benefit of my readers.
This is not a complete list of circumstances that a taxpayer could use to receive a tax penalty reduction. These are the situations that I believe the IRS will accept, based on the Internal Revenue Manual.
Any reason or justification other than these factors will prove more difficult for the IRS to justify the reasonable cause.
Tax penalty abatement element 1 - Ordinary business management and prudence. (IRM 20.1.1.3.2.2)
It is possible to show ordinary business care and prudence by proving that the taxpayer tried their best to comply with their tax obligations but due to circumstances beyond their control were not able to.
When determining whether to reduce a tax penalty due to reasonable cause, the IRS usually considers four factors.
First, the taxpayer must have compelling reasons to seek the penalty abatement. All explanations must be compatible with the dates and circumstances upon which the penalties were based.
The IRS also looks at the taxpayer's compliance history. While it is not likely that taxpayers who have had past issues with compliance will be denied tax penalty relief; however, bad behavior can sometimes impact the taxpayer's financial situation.
Third, the time it took for the taxpayer's compliance must be reasonable given the circumstances
The circumstances that lead to tax penalty abatement must not be within the control of the taxpayer.
The IRS will carefully examine all these factors and may request supporting documentation from taxpayers to verify the sequence of events claimed.
Tax penalty abatement element 2 - Death or serious illness or unavoidable absence (IRM 20.1.1.3.2.2.1).
A tax penalty reduction from the IRS is possible if there are any death, serious illness, or other serious medical condition. This applies to both individual taxpayers and their families, as well as corporate taxpayers if the sole person responsible for tax compliance is absent.
The IRS will look into the steps taken by a corporation to comply with the condition. While it's not easy to share personal information with the government, it's important to document the circumstances that led to the non-compliance.
This includes details and dates related to:
The severity of the condition
Relationship between the taxpayer and the person with the condition (if it is not the taxpayer).
Additional information that may be of use to the IRS in determining your case
Remember that eventually, a human being will review the facts and circumstances surrounding the tax penalty abatement.
It is perfectly acceptable to ask for sympathy from the IRS when you request tax penalty abatement.
Bottom of Form
Tax penalty abatement element 3 - Ignorance law (IRM 20.1.1.3.2.2.6).[1]
This factor can be used as a reasonable cause argument but it is harder to use. However, ignorance of the law may still be a factor the IRS might consider when determining whether a tax penalty abatement is valid.
Some taxpayers may not know that they must file and pay certain tax obligations due to their past or education. If the taxpayer can comply with the law, they are not subject to penalization for ignorance.
The IRS will consider the educational history of the taxpayer, whether they have been subject to this tax before, and whether they have ever been penalized (the kiss of death to this argument). If there have been recent changes to the law, any reporting requirements, or forms that the taxpayer wouldn't reasonably expect to know about, they will also look at the taxpayer's past education.
The IRS believes that ignorance of the law is not a good thing. They believe that any taxpayer who fails to make a reasonable effort should understand the law. If you want to reduce your tax penalty, it is better to rely on other factors than just this one.
However, ignorance of the law is not necessarily a weakness. You can combine it with other factors to help you position.
Tax penalty abatement element 4 - Forgetfulness and mistakes (IRM20.1.1.3.2.2.7).[2]
Forgetfulness
My professional opinion is that you should not attempt to abate a tax penalty based on forgetfulness. It's better to not mention this in your argument for a penalty reduction than to the IRS.
The IRS does not consider forgetfulness a sign that you did not exercise reasonable care and prudence to comply with your tax obligations. In the IRM, the IRS states that relying on someone else to fulfill your obligations or provide oversight for you is not sufficient to establish reasonable cause.
Mistakes
While mistakes are less likely to be deemed suspicious, the IRS quickly points out that making a mistake does not indicate that you have been exercising ordinary care. These factors are not so important. Instead, you should forget about them and pursue other avenues to argue for your tax penalty reduction.
Tax penalty abatement factor 5. - Unable records to be obtained (IRM 20.1.1.3.2.2.3).[3]
This is a double-edged weapon, but I have personally seen several tax penalty abatements that were accepted because the taxpayer couldn't obtain the records necessary to comply with their tax obligations.
It is essentially about:
- How reasonable was it that the records were not available?
- The taxpayer had control over the records.
The IRS sees filing incorrect information as worse than not filing.
It is a sign of diligence that the taxpayer waits until they have all the information necessary to file a complete and accurate tax return. Your argument will depend on how long it took you to discover the records and the efforts you made in rectifying the problem.
This argument can be used to abate tax penalties, but it is dependent on the facts.
Tax penalty abatement element 6 - Undue hardship IRM 20.1.1.3.3.3)
The IRS can also use undue hardship to reduce a tax penalty. Undue hardship is defined by the IRS as " more than an inconvenience for the taxpayer." [1]"
This means that the taxpayer must document and show serious financial or personal hardship to reduce tax penalties as a result. This is not an easy feat, even for a professional.
The IRS will not consider any circumstances severe enough to prevent payment of taxes in very few cases.
- Personal health is at grave risk (cannot pay for medical bills).
- Loss of your primary residence (cannot afford rent) or to the detriment of minor children or dependents. (Cannot pay their food or housing costs).
The IRS will not consider any other factors in determining if you have an undue hardship.
Another important point to remember is that in cases where items are tied to failure to pay, undue hardship generally qualifies as an appropriate justification. The IRS does not generally excuse penalties for taxpayers who fail to file due to undue hardship. [2]
According to the IRS financial hardships generally don't affect taxpayers' ability to file. However, I have personally been successful in releasing any penalties that may be associated with failure to file due to economic hardship.
What is most important to me is the context of the taxpayer's request. No matter what penalties are being applied, good facts will prevail over most IRS objections.
Tax penalty abatement element 7 - Bad advice IRM 20.1.1.3.3.4 and errors made by IRS IRM 20.1.1.3.4
Although I won't say bad advice is the best way to get penalties reduced, bad advice from the IRS or tax practitioners is one of the most persuasive reasons to reduce tax penalties.
Tax practitioners often use this tactic to reduce penalties in other areas such as audits. The IRS will look for ordinary care and prudence when granting tax penalty abatement.
Logically speaking, if you believe the IRS, they should be held responsible for any penalties.
Relying on a tax adviser is, however, an indication that you have admitted ignorance about certain tax issues and are putting your faith in someone who has been trained in these matters.
Relying on a tax adviser is only reasonable if the taxpayer is negligent (negligence). The IRS can also prove financial sophistication, which would indicate that the taxpayer should not have trusted them.
This tactic is generally a good one to use, given the facts. In most cases, the IRS will correct any mistakes they make without too much resistance from the taxpayer.
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