By: Scott Lawrence | 09/22/20
Each year, the Internal Revenue Service assesses millions of tax penalties against individuals and businesses. If you have received an IRS penalty notice, you are not alone. In 2019, the IRS sent over 40 million penalty notices and assessed over 40 billion dollars in penalties. More than 60 percent of these penalty notices involved just two offenses: delinquency (failure-to-file) and failure-to-pay.
These two penalties can be quite costly. Although they are legally capped at a combined rate of 5 percent per month on the unpaid tax amount, together these two penalties can rise to as much as 47.5 percent of the unpaid tax. For example, a $100,000 unpaid tax liability on a return filed late could, in some scenarios, ultimately result in $47,500 of penalties.
The IRS, as explained below, can reduce these penalty assessments. In 2019, the IRS reduced almost 4.3 million penalties, resulting in total penalty decreases of 11.4 billion dollars. More than 60 percent of these penalty reductions, or abatements, as the IRS calls them, involved delinquency and failure-to-pay penalties.
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.
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:
Some key IRM reasonable cause factors and considerations are:
Calling the IRS Practitioner Priority Service (PPS) can sometimes result in the abatement of penalty assessments under the IRM’s First Time Abate (FTA) procedures. IRS Customer Service Representatives at the PPS call center use a software tool that can readily determine whether the taxpayer meets the criteria for a first-time abatement.
Reasonable cause abatement requests must be submitted in writing to the IRS Service Center that assessed the penalty as shown on the penalty notice. 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. In many cases, particularly those with rather unique or unusual facts and circumstances, it will take a telephone hearing with the IRS Appeals Division to get the fullest possible consideration of the reasonable cause factors.
Bennett Thrasher has a Tax Controversy Practice that helps clients resolve IRS matters prior to the litigation stage. This includes helping clients manage IRS tax disputes involving both field and correspondence audits; post-audit issue resolution, including representation in IRS appeals; penalty and collection notices; and other tax compliance-related matters. For more information contact James Pickett by calling 770.396.2200.
Back to insightsNever miss an update. Sign up to receive our monthly newsletter to unlock our experts' insights.
Subscribe Now