Each year the IRS assesses millions of penalties against taxpayers. Most taxpayers are unaware that post-assessment the IRS also abates many of those same penalties. During fiscal year 2012 the IRS assessed 37 million penalties against taxpayers. The IRS later abated about 5 million of those penalties. Most of those abatements occurred because taxpayers or their representatives contested the penalties. It is important for those subject to IRS penalties to know their rights to dispute a penalty assessed by the IRS.
The IRS Penalty Handbook is available to taxpayers on the IRS website at: http://www.irs.gov/irm/part20/. The Penalty Handbook describes the various penalties that may be assessed against taxpayers. There are over 100 potential penalties that might be asserted against a taxpayer. The majority of the penalties however: fall into two categories: collection penalties and accuracy related penalties.
The most common collection related penalties are:
- Late filing up to 25% of the unpaid taxes of the return
- Late payment up to 25% of the unpaid taxes
- Late federal tax deposits up to 15% of late deposits
The most common accuracy with related penalties are:
- Negligence penalty up to 20% of the understated taxes
- Substantial understatement penalty up to 20% of the understated taxes
For taxpayer subject to IRS penalties the handbook provides a listing of the IRS’s favorite reasons for reducing penalties. In considering non-assertion or abatement of penalties the IRS applies a standard of “Reasonable Cause”. Most people are unaware that the IRS will consider the following as reasons it might reduce a penalty:
- Death, Serious Illness, or Unavoidable Absence
- Fire, Casualty, Natural Disaster, or Other Disturbance
- Unable to Obtain Records
- Mistake was Made
- Ignorance of the Law
- Statutory Exceptions or Waivers
- Undue Hardship
- Written Advice From IRS
- Oral Advice From IRS
- Advice from a Tax Advisor
- Official Disaster Area
- IRS Error
The taxpayers who have not had a previous delinquency the IRS generally may apply a First Time Abatement Rule upon request by the taxpayer. If taxpayer has not previously been required to file a return or if no prior penalties (except the Estimated Tax Penalty) have been assessed on the same against the same taxpayer. This First-Time Abate (FTA) is an Administrative Waiver. A taxpayer seeking an an FTA must request a penalty reduction in writing.
It is important that taxpayer seeking reduction of penalties reference the appropriate section of the IRS Penalty Handbook. IRS employees reviewing penalties use a computer program known as reasonable cause assistant. In other words the IRS uses artificial intelligence to determine whether to reduce a penalty. Those who specifically reference to a section of the penalty handbook are much more likely to have IRS penalties reduced. Not all IRS employees are adequately trained in the reasons for reasonable cause. Those taxpayers referencing the penalty handbook have a much greater chance of success than those who merely submit a statement of facts to support their request for reduced penalties. In other words those who avoid the need for an IRS employee to research reasons for penalty reduction by citing directly to the IRS manual will be much more successful than those who rely upon the IRS to properly research that manual.
If you have questions about abating penalties, please call Henry Aldana 31-77-4901 or write him at Haldana@aldanas.com
Aldana & Associates, PSC, LTDS