Abating IRS Penalties: Ways to Reduce or Even Eliminate Common Assessments
By Susan C. Allen, CPA/CITP, CGMA [ILLUSTRATION OMITTED] The IRS can assess many types of penalties against taxpayers: late-filing penalties, late-payment penalties, estimated tax penalties, accuracy-related penalties--and the list goes on. This column summarizes common IRS penalties that tax practitioners see almost daily, and practical ways to obtain a penalty abatement. FAILURE-TO-FILE AND FAILURE-TO-PAY PENALTIES (SEC. 6651) Many taxpayers file a return late and/or make a payment late. The IRS sends out automated notices proposing failure-to-file and failure-to-pay penalties, often referred to as late-filing and late-payment penalties--and abates many of them. First-time penalty abatement is an easy "get-out-of-jail-free card" for taxpayers who have a clean compliance history of filing and paying on time with no prior penalties (other than an estimated tax penalty) for the past three years. The reasonable-cause (facts and circumstances) defense can also be successful. Refer to Internal Revenue Manual (IRM) Section 20.1.1.3.2 for a list of the IRS's criteria for evaluating the most frequently raised defenses for these penalties. Death, serious illness, fire/casualty, erroneous advice, forgetfulness, and even ignorance of the law are among the defenses discussed in the IRM. In addition, other administrative waivers could apply to certain taxpayers, such as disaster victims. Here are penalty abatement tips for failure-to file and failure-to-pay penalties: * If a client meets penalty abatement criteria, practitioners can attach a penalty nonassertion request to a late-filed return. This way, a practitioner could potentially avoid a notice stream altogether. * Practitioners should cite applicable law and authority, including the IRM, when requesting a penalty abatement. * Under Sec. 6651(h), the failure-to-pay penalty continues to accrue but at a reduced rate when a taxpayer establishes an installment agreement. However, if a client meets penalty abatement criteria, the practitioner can request penalty abatement at the beginning of the installment agreement and again at the end (i.e., after the debt is paid in full). If the IRS removes penalties at the beginning of the agreement and the taxpayer adheres to the agreement's terms, the IRS can also remove the penalties that continued to accrue until the tax was paid in full. * Often, qualifying for relief under the reasonable-cause criteria is subjective, depending on the IRS agent who considers the case. If the IRS originally denies a penalty abatement, consider using the Office of Appeals. Appeals may come to a different conclusion based on the hazards of-litigation standard. At the very least, Appeals officers may be more willing to negotiate and compromise than IRS agents. * Due to IRS budget cuts and service issues, more practitioners are finding relief for their clients via Appeals. It may take over a year to resolve the issue, but it can be worth the wait. Some practitioners have even seen Appeals remove penalties based on first-time penalty abatement criteria, even if the taxpayer did not exactly meet the criteria. ESTIMATED TAX PENALTY (SEC. 6654) Individual taxpayers must adequately withhold from their wages and/or make estimated tax payments evenly throughout the year. When they do not, the IRS may impose the estimated tax penalty, commonly referred to as the underpayment penalty. There is no general reasonable-cause exception for the estimated tax penalty; therefore, it is often more difficult to get the penalty removed, but it is not impossible. The IRS may abate it if the taxpayer (1) proves that the IRS incorrectly charged the penalty or made an error, (2) shows that calculating the penalty under a different method reduces or eliminates it, or (3) proves that he or she meets the waiver criteria discussed in Sec. 6654(e)(3) (i. …