Anyone who has fallen behind on taxes–whether IRS or state—knows how quickly the liability can snowball. With the double whammy of penalties and interest on top of the tax, what started as something manageable can quickly turn into a huge problem. Consequently, it comes as no surprise that savvy tax debtors want to do whatever they can to reduce the amount owed.
One of the ways to reduce a tax liability is to get rid of some or all of the penalties. In tax-speak, this is called getting penalties abated. If you want to know whether you might have a good case for penalty abatement and, if so, how to give yourself the best possible chance of winning, read on.
Two of the most common forms of penalty relief, and the two that I will discuss, are:
1. Abatement based upon reasonable cause, and
2. The IRS First Time Abate program.
The First Time Abate Program may be the best route to eliminate penalties related to one tax return, provided that you or your business have a squeaky clean tax record for a minimum of three years prior to the return for which the penalty or penalties were incurred. If you can demonstrate that you had “reasonable cause” for whatever caused the penalties, you can get those penalties removed regardless of how many times you’ve filed returns and were penalized. Just keep in mind that the longer your pattern of non-compliance, the more difficult it will typically be to convince the taxing authorities that you have reasonable cause.
I’ll cover the First Time Abate (FTA) method first followed by the reasonable cause method. If FTA doesn’t sound like the right method for you based on the preceding paragraph, you may want to skip ahead to the reasonable cause portion of this article.
IRS First Time Abate
Quoting from the IRS website:
You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due under the Service’s First Time Penalty Abatement policy if the following are true:
- You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
- You filed all currently required returns or filed an extension of time to file.
- You have paid, or arranged to pay, any tax due.
- The failure-to-pay penalty will continue to accrue, until the tax is paid in full. It may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the Service’s first time penalty abatement policy.
- Other administrative relief: If you received incorrect oral advice from the IRS, you may qualify for administrative relief.
If you think you meet the above criteria, call the toll-free number on the penalty notice you received and request a First Time Abate Waiver.
The following will cover IRS criteria and procedures for abatement of penalties based on reasonable cause. Keep in mind that most states have similar criteria.
In order to get penalties abated due to reasonable cause, you must demonstrate that you exercised ordinary business care and prudence in determining your tax obligations but nevertheless failed to comply with those obligations.
When reviewing your request for abatement of penalties, the IRS will look at four general categories:
- Your reason for the lack of compliance in order to ensure that the dates and explanations clearly correspond with events on which the penalties are based.
- Your compliance history for payment patterns and your overall compliance history to determine if this is your first incident of noncompliant behavior. The IRS typically goes back at least three years to review your payment patterns and overall compliance history as prior assessment of the same penalty may indicate that you are not exercising ordinary business care.
- The length of time between the event cited as a reason for the noncompliance and subsequent compliance is taken into consideration.
- If there were circumstances beyond your control that resulted in the accrual of a tax liability in order to determine whether you could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when a taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to timely meet the tax obligation.
Some of the most common events that give rise to reasonable cause are:
- Death, serious illness, or unavoidable absence of the taxpayer or immediate family that resulted in the tax liability.
- Fire, casualty, natural disaster, or other disturbance that caused the taxpayer to not be able to file or pay the tax liability. Inability to obtain records to file a return due to circumstances beyond the taxpayer’s control despite the taxpayer exercising ordinary business care and prudence may establish reasonable cause.
- Reliance on erroneous advice will be considered but is generally not reasonable cause, as the taxpayer is responsible for meeting his or her tax obligations and that responsibility cannot be delegated.
- Ignorance of the law constitutes reasonable cause in very limited situations. The taxpayer needs to demonstrate that a reasonable and good faith effort was made to comply with the law, or that they were unaware of a requirement and could not reasonably be expected to know of the requirement.
- With regards to individuals, an undue hardship may be grounds for abatement if it can be proven that the taxpayer would sustain a substantial financial loss if required to pay a tax or deficiency on the due date. However, an undue hardship generally does not affect a person’s ability to file and therefore would not provide a basis for penalty relief in a failure to file situation.
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.
Although the above criteria is supposed to apply across the board within the IRS and is supposed to be applied consistently to all taxpayers, I have found that this is not always the case. Understand that a human being is going to decide whether you’ve established reasonable cause, and no human being is the same.
Just as a party to a lawsuit might win with a certain judge while losing with others, the same is true with penalty abatement requests. Likewise, just as one attorney might lose a trial before a certain judge while a different attorney with the same case would have won before that same judge, the same is true with penalty abatement requests. In other words, both the decisionmaker at the IRS and the quality of the request itself can affect whether the request will be approved.
Abatement Request Decisionmaker
If your case is currently assigned to the IRS Automated Collection System (ACS), then you or your tax pro would send a penalty abatement request to ACS. Who you will get as a decision-maker at the IRS is a crap shoot, so the best you can do is focus on the quality of your request for abatement. If you have a significant amount of penalties, it may make sense to hire an experienced tax relief attorney to prepare and present your case for you. This will give you the best chance of prevailing.
If your case has been assigned to a Revenue Officer (RO), that will typically be the person who reviews your request. Though you cannot control which RO you get, at least you will have an opportunity to interact with this person and get a sense of what he or she is like before you request abatement.
It is helpful to understand the general mentality of an RO, and take that into account when forming your abatement strategy. By the time a case reaches an RO, the taxpayer has received multiple collection notices in the mail, and has had ample time to either pay or voluntarily resolve the unpaid tax debt.
As federal law enforcement officers, ROs have a tremendous amount of power and are tasked with stopping the non-compliance of taxpayers in collections while collecting the unpaid taxes as quickly as they possibly can. Experienced ROs have heard every excuse in the book, have been lied to over and over and over again, are often jaded, and generally don’t have a high opinion of taxpayers who have severe enough tax issues to have been assigned to an RO (though some RO’s will mask their disgust with a smile and friendly demeanor—don’t be fooled).
Taxpayers who have been assigned to an RO for collections often make the mistake of focusing solely on their own needs, such as getting penalties removed, avoiding garnishments and seizures, getting low monthly payments or getting a sweet settlement. Like just about any human relationship, things tend to go better when both parties’ needs are acknowledged and addressed. Consequently, it follows that your chances of having a penalty abatement request approved increase if you first demonstrate a strong effort to meet the RO’s needs.
Though in reality, an RO’s opinion of different taxpayers falls along a spectrum, for the sake of illustration, let’s say that ROs categorize taxpayers into 3 categories:
- Cooperative tax debtors demonstrate a sincere desire to resolve their tax debts, are honest and straight-shooting with the RO, get into compliance with all tax obligations, return phone calls in a day or two, and meet all deadlines that the RO sets.
- Average tax debtors make an effort to cooperate with the RO, but sometimes neglect to, or are unable to, fulfill the requirements set by the RO.
- Uncooperative tax debtors frequently miss deadlines, submit incomplete documents, ignore correspondence and voice messages from the RO, and/or fail to get into compliance with the tax laws.
ROs are no different than most workers in just about any industry in the sense that they generally want to accomplish their duties with as few headaches and hassles as possible. Their basic objectives are to enforce the law by stopping non-compliant behavior (late filing, non-payment or late payment of taxes, failing to make tax deposits, etc.) and to close cases as “resolved” (collect full payment, approve an installment agreement, have the case settled via an Offer in Compromise, close the case as Currently Not Collectible, etc.). They have managers to whom they must answer, and they cannot close a case without the financial information that is necessary to support whatever resolution agreement they wish to approve.
Thus, to meet the needs of an RO in a hassle free fashion, tax debtors should do everything they possibly can to be perceived as a “cooperative.” This means complying with all tax laws, being honest in all communications including financial reporting, responding to all RO correspondence and phone calls in a timely fashion, and providing all requested financial information by the date due.
Understand that every RO has a number of tax debtors in his or her inventory that do not do these things. Those tax debtors tend to be the recipients of the RO’s ire. Conversely, “cooperative” tax debtors have a far better chance of receiving the RO’s grace.
Legally, an RO’s opinion of a taxpayer has no relevance to establishing reasonable cause. Legally, the facts either establish reasonable cause or they don’t. With that said, ROs are human beings, and requesting an abatement of penalties is akin to requesting a favor. It goes without saying that someone who is happy with you will be more likely to do you a favor than someone who is not.
So, rather than asking an RO to abate penalties early in the relationship, I recommend first demonstrating a pattern of being cooperative. Meet the RO’s needs by working out an agreement so that the RO can close the case as “resolved.” Then, right after the RO expresses willingness to approve an agreement, submit a written request for abatement of penalties.
Submit a High Quality Abatement Request
The other important variable that will affect your abatement request’s chances of success is the quality of the written request for abatement. Although you cannot change the set of facts that resulted in the penalties, you can certainly present them in a fashion that will maximize your chances of approval.
The key is to focus on facts that will best demonstrate that you did, in fact, have reasonable cause, and to then apply the law to those facts in a manner that will lead the IRS or state to determine that reasonable cause has been established. A very common mistake is to include various facts in an abatement request that do not help establish reasonable cause. These facts will often hurt your case and should be omitted.
It may be wise to have an experienced tax relief attorney prepare a penalty abatement request on your behalf, especially if you have incurred a large dollar amount in penalties. A skilled tax relief attorney will know which facts to present, and how to present them in a compelling fashion that is consistent with both the tax laws and penalty abatement criteria. This will bolster your chances of getting your request approved, and can make the difference between approval and denial.
A good tax relief attorney should always prevail when they have a strong penalty abatement case, often prevail when they have a mediocre case, and occasionally prevail when they have a weak case. Although you cannot change the facts, you can give yourself the best chance of winning with what you have by seeking the assistance of an experienced tax relief attorney.
If you are interested in learning whether you have a strong case for an abatement of penalties, pick up the phone and give us a call. Fortress Tax Relief has knowledgeable and caring professionals on staff who would be happy to evaluate your situation and outline a solution for you at no charge.success
At Fortress, we guarantee that the tax practitioner handling your case will be a licensed attorney who has demonstrated superior advocacy skills – both verbal AND written. Since attorneys possess comprehensive training in legal writing and our staff possesses extensive experience in drafting Formal Requests for Abatement of Penalties, we can assure you of the very best chances of obtaining an Abatement of Penalties.
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