Check your notice to see if the IRS is correct in assessing penalties!
If the IRS has made a mistake in assessing taxes against you, then if you can resolve the incorrect tax assessment, any penalties associated with the incorrect tax will also have to fall away. There are many ways an addition to tax can arise, and any addition to tax will have a related penalty. Keep in mind when receiving an IRS tax balance notice to carefully check if the tax is correct. If the tax is correct, then the penalties related to the tax have to be paid (or abated, see below).
However, if the tax is incorrect, the penalties on the portion of incorrect tax would automatically be removed along with the incorrect tax. Read your notice carefully and if you don’t agree with the IRS assessment, then that is your first line of attack against the penalties. The IRS will give you a chance to dispute additional taxes during an audit. But if you dropped the ball on the audit, you could request an audit reconsideration. Or you can file an amended tax return and provide an explanation and documentation to support a change to the IRS income and tax. Both the audit reconsideration and 1040X (amended) are outside the scope of this topic, and you should consult an accountant or professional tax preparer when you want to challenge the IRS’ position.
First Time Abatement
If you have had no penalties on your taxes for the previous three years, you can ask for an abatement of the penalties for one year only. This applies to individual taxpayers and can be an easy way to reduce one year’s worth of penalties, just by asking.
That first time abatement is the only time the IRS will abate penalties just for asking. All other penalty abatement requires a very good reason for abatement. You must have “Reasonable Cause” for the failure to file or pay your taxes in order for the IRS to reduce or abate the penalties associated with the unpaid tax.
Be In Compliance with the rules
Whether you are a business or individual with assessed penalties from unpaid taxes, you should try to position yourself as best you can to be in compliance before you ask for abatement of the penalties. Simply put, to be in compliance is to file any missing returns and pay the tax for the current year or quarter (if your business must make 941 deposits, you must be up to date for the current quarter).
You need not be paying towards the back taxes balance in order to be “in compliance.” But it will help your case to show good faith towards resolving the balance if you have taken the steps to pay the balance back (e.g., enter into an installment agreement), AND THEN ask for penalty abatement.
To reiterate, before you ask the IRS to forgive the penalties, it is best to present yourself as following all the rules of filing and paying the current taxes. Requesting an abatement of penalties when you aren’t in good standing (not filing or paying the current taxes; having an unresolved tax liability) is kind of like asking mom for allowance when you haven’t done your chores and you just tracked mud all over the house. Better to ask after you’ve done your chores and your homework.
When you do not file and pay on time, the IRS adds a penalty to the taxes owed. To forgive those penalties, you have to provide a good reason for not filing or paying on time. The IRS will want to know what exactly happened to keep you from filing and paying on time. The key to persuading the IRS to forgive penalties is to show them that you would have paid the taxes but something outside your control prevented you from doing so. Put another way, you will have to prove to the IRS that despite your best efforts to file and pay your taxes, some circumstances “outside your control” prevented you from voluntarily filing or paying your taxes.
There are three main penalties: failure to deposit timely, failure to pay timely, and failure to file timely. Some of the situations that will allow for abatement of these types of penalties include:
- Fire, casualty, natural disaster or other disturbances;
- Inability to obtain records;
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family;
- Other reason which establishes that you used all ordinary business care and prudence to meet your federal tax obligations but were nevertheless unable to do so.
-The IRS makes very clear that
“A lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time.” (IRS.gov)
-However, if you can demonstrate that the reasons for the lack of funds was caused by one or more of the above circumstances, then you may meet the reasonable cause criteria for the failure to pay penalty.
The above types of circumstances are what the IRS calls “Reasonable Cause” for the failure to file or pay. If you can demonstrate convincingly that you had reasonable cause for failure to file, deposit, and/or pay, the IRS will abate the corresponding penalties.
Write a compelling penalty abatement request.
If you were subject to any of the above circumstances that led to the inability to pay or file your tax return, then the next step is to write a compelling penalty abatement request. A strong abatement requests includes a narrative explaining what happened, supporting documentation, and a convincing argument that you’ve met the legal criteria for reasonable. In the narrative, you have to connect the incident or circumstances that occurred with the corresponding year’s or quarter’s failure to file or pay. Each tax year, or quarter if you are a business, stands alone. That is, each tax period deserves an accounting of what happened. If you show clearly that your ability to pay or file was prevented by what happened and that it meets the criteria for reasonable cause, then you will likely receive an abatement.
Put another way, if you have a very good excuse and you can back it up with evidence and law, the IRS will abate the penalties.
Make sure your narrative includes these facts: (From IRS.gov)
• What happened and when did it happen?
• What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file and/or pay your taxes timely.
• How did the facts and circumstances affect your ability to file and/or pay your taxes or perform your other day-to-day responsibilities?
• Once the facts and circumstances changed, what actions did you take to file and/or pay your taxes?
• In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?
Provide Supporting Documents
Use as much written evidence to support your story as you can find. For example, if you were hospitalized, provide hospital records or court documents that establish your illness or incapacitation, with specific start and end dates.
Use records and reports of natural disasters that describe the details, of when, where and how extensive the damage and effects of such disaster were. When an area is given a disaster area designation due to floods, hurricanes and fires you will have that objective statement or report of the underlying disaster. Then you have to describe with detail how the disaster affected you or your business in particular.
Be Prepared to Appeal a Rejection
If your first attempt fails, be prepared to write an appeal. Even a very well supported reasonable cause explanation can be rejected under the IRS’ first review. In those cases, be prepared to file an appeal. Also be prepared to wait a long time to hear back from the IRS. Unless your case has been assigned to a local Revenue Officer (tax collector), there is no one to call at the IRS 800# on the first attempt at penalty abatement. You will simply receive a letter granting or rejecting the request. There will be little to no explanation for why your request was rejected. It will most likely read, “The IRS did not agree with your reasons for penalty abatement.”
When you file an appeal however, an appeals officer will be assigned to your case, and you will be able to discuss your request over the phone. It is not easy to remove penalties. The Internal Revenue Code makes it federal law to add penalties for late filing and payment of taxes. Once assessed, penalties are part of your collectible debt. The code also gives narrow conditions for abatement of penalties. Taking the above steps for preparing a good penalty abatement request will help you improve your chances for abatement.
When you prepare a written request for penalty abatement ask someone to proof-read it for clarity and consistency, basically to make sure it makes sense to someone else. You may have a lot of emotion and feelings tied to the events that you hope will excuse the failure to file and pay. But those facts don’t always add up to a good enough reason to excuse the failure to file and pay. You will help your case by getting an outside opinion of how well you have tied your situation to the failure to file or pay. It always helps to have an attorney review your story. I have seen many stories that include facts and statements that they think help their case, but in fact would hurt their case. It helps to know what NOT to say as well as what to say in your abatement request. An experienced attorney will know what facts to use to your advantage.
It is also important to have an attorney on your side to represent the facts of the situation in writing, but also by phone. If you receive a rejection, you can appeal the rejection in writing and also discuss your case with an appeals officer. You will want to craft arguments in writing and in person to maximize your chances of success. It is often worth paying an attorney to craft legal arguments to demonstrate how the law applied to your facts demonstrates reasonable cause for penalty abatement.
Apart from the first-time abatement, all other penalty abatements must be justified with a reasonable cause explanation. Not all situations will qualify for abatement, but it is definitely worth going to the extra trouble of preparing a good explanation to reduce the amount you owe.
Finally, if you owe a substantial amount in penalties (e.g. more than $10,000 in penalties), I strongly urge you to have a tax resolution attorney evaluate your case before you submit an abatement request. For large dollar penalty abatement cases, it may be well worth it to have an attorney prepare the request, and negotiate it on your behalf. A good attorney can significantly improve your chances of having your abatement request approved, and especially when there are large dollar penalties at stake, the attorney’s fee may be money well spent.
If you have a significant amount of penalties you would like to get rid of or if you simply owe taxes and would like some advice on the best way to resolve your tax debt, give us a call. Fortress Tax Relief has caring and knowledgeable professionals on staff who would be happy to evaluate your tax debt situation and recommend a solution tailored to your specific needs. There is no cost for a telephone consultation, so pick up the phone and call us today.