Each year, the IRS assesses thousands of tax penalties for filing tax returns, required forms and making payments late. Taxpayers frequently fail to challenge these penalties and in many cases, the taxpayer didn’t understand that a penalty had been asserted or the IRS mailed the penalty notice to the wrong address.
In cases where an IRS tax penalty is discovered months or even years after it has been assessed, there can still be options to mitigate the penalty.
Penalty Abatement Requests
If the penalty hasn’t been paid or was paid within the past two years, a written request to the IRS requesting penalty abatement can be made. The IRS will abate penalties if the taxpayer can establish a reasonable cause for the tax compliance failure. In cases involving a taxpayer’s first penalty, the IRS will sometimes abate the penalty under its first-time abatement procedure.
The IRS abates these two penalties under two basic provisions that are contained in its Internal Revenue Manual (IRM), a procedural guidebook for IRS employees that is also available to the public.
- First Time Abatement: This is simple to request if a taxpayer meets the criteria. This administrative waiver, implemented in 2001, is available for penalty relief the first time an individual taxpayer is subject to the delinquency or failure-to-pay penalty. In short, taxpayers qualify for this one-time abatement when they have met their return filing and payment responsibilities and have not had either of these Form 1040 penalty assessments in the prior three years.
- Reasonable Cause: These penalties will be abated in cases where the taxpayer can establish reasonable cause. Reasonable cause determinations by the IRS are based on the facts and circumstances in each situation. It is generally present when the taxpayer exercised ordinary business care and prudence but was still unable to comply due to circumstances beyond the taxpayer’s control.
The IRM is an excellent guide for tax professionals when requesting penalty abatements for clients. Part 20 of the IRM explains the factors that IRS uses to determine if reasonable cause exists for filing or paying late. The abatement request for reasonable cause should answer the following general questions:
- What happened and when?
- What facts and circumstances prevented filing a return or paying a tax?
- How did these facts and circumstances result in noncompliance?
- Once the facts and circumstances changed, what attempt did the taxpayer make to comply, and was this attempt made within a reasonable time frame?
Appeal to the IRS Independent Office of Appeals
While many taxpayers believe that the first decision in an IRS tax compliance matter is final, almost all decisions are subject to review by the IRS Independent Office of Appeals.
As the name implies, the Independent Office of Appeals is staffed by IRS employees who work independently of IRS tax law enforcement employees. Appeals’ mission is to resolve tax controversies without litigation. In many IRS penalty cases, particularly those with rather unique or unusual facts and circumstances, it will take a telephone hearing with the IRS Appeals Officer to get the fullest possible consideration of the reasonable cause factors.
If a reasonable cause abatement request is denied, the taxpayer will have 60 days to file an appeal with the Service Center Appeals Coordinator as explained in the denial letter. As of February 2022, the IRS wasn’t enforcing the 60-day appeal filing deadline – good news for those responding late.
We’re Here to Help
Bennett Thrasher’s Tax Controversy practice can help you navigate how to best respond to IRS penalty notices. To learn more about our services, contact James Pickett, Director of our Tax Controversy practice, by emailing firstname.lastname@example.org.