“Penalty abatement” is tax-speak for getting tax penalties eliminated, reduced or removed. It is simply a different way of saying “penalty removal,” “penalty waiver,” “penalty reduction” or “penalty elimination.”
Individuals and businesses who have accrued a tax liability are very often shocked at how quickly the principal liability snowballs with the addition of penalties and interest. It is, therefore, no surprise that eliminating penalties is a high priority for many.
The 3 most common types of penalties are:
- Late filing penalties
- Late payment penalties
- Late deposit penalties
There are also many other various penalties that the IRS or state taxing authorities can assess for a variety of different reasons. Regardless of the type of penalty, there is typically at least one, if not more, method that can be utilized to request removal of the penalties.
Two of the most common forms of penalty relief are:
- Abatement based upon reasonable cause, and
- 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 have filed returns that incurred penalties. 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.
In order to get IRS 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. Note that most states have similar criteria and will abate penalties if you demonstrate reasonable cause.
When reviewing a 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 are supposed to apply across the board within the IRS and are supposed to be applied consistently to all taxpayers, in practice, this is not always the case. Understand that a human being is going to decide whether you have established reasonable cause, and no human being is the same.
Of even greater importance is the fact that a human being will prepare the request for abatement of penalties, and no human being is the same. The quality of the request matters and, accordingly, the chances of success go up significantly with a request that is well crafted, well drafted, and well supported.
When it comes to eliminating penalties, Fortress Tax Relief has the competition beat. This is because all of our cases are handled personally by licensed tax attorneys (while our competitors predominantly employ accountants). Yes, abating penalties depends on facts, and we cannot change the facts. However, our attorneys know which facts to emphasize, which facts to exclude, and how to present those facts in the most compelling fashion that is consistent with both the tax laws and penalty abatement criteria. This significantly increases our clients’ chances of getting their penalties removed and can often make the difference between approval and denial.
FIRST TIME ABATE
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.
The First Time Abate program works well for those who meet the criteria and only have penalties on one tax return. If there are more than one tax periods with penalties, and if the facts are sufficient to support a case for reasonable cause, it is often the best practice to prepare and submit the strongest case possible in an effort to get all of the penalties abated. If the request for abatement is denied, the applicant may still be able to utilize the First Time Abate Program.
APPEALING A DENIED REQUEST FOR ABATEMENT OF PENALTIES
It is not uncommon within the IRS for the frontline workers who review requests for abatement of penalties to have a disposition that is not particularly friendly towards abatement requests. This might stem from their overly rigid view that taxpayers absolutely must file and pay on time or else. It is also possible that some of these federal employees simply don’t care and take the “good enough for government work” approach of leaning strongly towards rejection—the easy way out for them as employees.
However, the law is the law and a good tax attorney has ways to force the IRS to follow the law, even if their frontline workers refuse to. This is another reason why it pays to have an experienced tax relief attorney prepare a request for abatement of penalties—especially when those penalties are substantial. Not only should the attorney’s well prepared request have a much better chance of overcoming the IRS’s frontline employee’s recalcitrance, it sets the stage for a strong appeal in the event that the request is initially denied.
Many taxpayers make the mistake of preparing the initial abatement request themselves or of having their accountant prepare the initial request. Self-prepared and accountant-prepared abatement requests are frequently nothing more than the regurgitation of any and all facts that might be relevant coupled with a request that the penalties be removed. The problem that we see over and over again is that these requests very often include facts or arguments that hurt the taxpayer’s case. This makes it easy for the IRS to deny the request. Worse yet, once those facts or arguments have been presented, it is difficult to subsequently build a strong case for appeal. The “bell” with the bad facts or arguments has been “rung,” and it difficult to “unring” it on appeal.
On a brighter note, the higher-level Appeals Officers at the IRS tend to be more receptive to well-prepared and well-supported penalty abatement requests. Thus, the benefits of having an experienced tax relief attorney prepare penalty abatement requests are twofold:
- You have a much higher chance of succeeding with the initial request for abatement, and
- You are in a much stronger position to appeal in the event that the IRS frontline worker refuses to follow the law and denies the initial request.
Our attorneys always endeavor to build and present the strongest possible penalty abatement requests given the unique facts and circumstances of each case. When the IRS’s frontline worker denies an initial request and our attorneys believe the request should have been approved based on the facts and the law, they will appeal the denial—and often win.