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TAX PENALTIES

Five Reasons the IRS Abates Penalties

Jim Buttonow, CPA, CITP SVP Post-Filing Tax Services Published On June 24, 2021

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For most penalties (late filing, late payment, and return error), the basic five reasons the IRS abates penalties can be summarized below:

Abatement reason

Explanation

Oral or written advice by IRS on a tax return position that taxpayer reasonably relied on

Statutory exception

A specific exclusion from a penalty that is defined by law

Disaster area relief, combat zone relief

Appeals – hazards of litigation

IRS settlement, in an audit, based on likelihood of winning in court

Taxpayer and IRS settle an audit in IRS Appeals that removes an accuracy penalty

Administrative Waiver

IRS does not assess or abate a penalty to facilitate tax administration

Hardship failure to pay penalty relief; First-time abatement

Reasonable Cause

For late filing and late payment penalties: the taxpayer has circumstances outside of their control that made them unable to comply. For return accuracy penalties, a reasonable attempt was made to report the proper amount of tax on a tax return.

Many Reasonable Cause arguments including:

  • Long-term illness 
  • Disaster 
  • Loss of records 
  • Reliance on advice 
  • Honest error

Of the five basic reasons for abatement,  Administrative Waiver and Reasonable Cause are the most commonly used. The most common Administrative Waiver is first-time abatement (“FTA”) which provides a taxpayer a “get out of jail free” pass on the late filing and payment penalties if they have a clean compliance history. This means no tax penalties in the past three years prior to the year in question.  In 2012, it was reported that almost 2 million taxpayers qualify for FTA, but only about 8% request it.

The second most common reason is for “Reasonable Cause.” Reasonable Cause is the IRS term for having a good excuse for non-compliance. Recklessness and willful blindness do not satisfy Reasonable Cause and you need not apply. Reasonable Cause is based on the taxpayer’s facts and circumstances and can be shown by demonstrating that you made an attempt to comply but could not do so because of unforeseen circumstances or hardship.    

For return accuracy penalties that are commonly seen in CP2000 notices or audits, the most important factor is the taxpayer’s reasonable attempts to report the correct tax (i.e. all of your income and properly deduct expenses and credits).

The content of your Reasonable Cause request is important

Reasonable Cause arguments are commonly denied for two things:

The IRS ignores all of the facts in your letter:  Because the computerized penalty abatement decision tool looks at each Reasonable Cause argument in a silo, they often overlook the totality of your circumstances.

For example, a taxpayer may ask the IRS for failure to file penalty abatement because they had a long-term illness at the time the return was due to be filed. The taxpayer may have also engaged a Tax Pro to help and relied on them to file an extension or the return on time. In these circumstances, if the taxpayer suggests that they relied on a Tax Pro to file on-time, they will be automatically denied Reasonable Cause abatement for the failure to file penalty. 

Why? Because the IRS generally does not allow “reliance on a tax professional” as the sole reason for failure to file penalty abatement. The IRS’s computerized penalty decision tool (Reasonable Cause Assistant - RCA) will deny the penalty abatement because it is programmed to deny whenever reliance on Tax Pro is cited as a reason. IRS personnel almost exclusively rely on this tool for abatement determinations. 

In the example, the taxpayer’s illness triggered circumstances outside their control would be the primary reason for abatement. However, the IRS tool only saw one negative factor in isolation and denied the abatement.

The letter was incomplete: If the taxpayer was incapacitated at the time of filing or there was emotional distress (and the taxpayer had limited financial knowledge) and this was the first time they filed late, an abatement is possible. The totality of the circumstances along with a timeline of what occurred will bolster your argument. A short statement that says “I received a penalty, but I gave it to my accountant” will likely not work.

Reasonable Cause relief for accuracy penalties relief

A common Reasonable Cause argument is to state that you relied on a tax professional who made the error. Many arguments stop there and the IRS denies them because they are incomplete. Adding the credentials and experience of the tax professional, your lack of tax knowledge, the information provided to the accountant, and how you reviewed the return and concluded that it was filed correctly will provide necessary facts for a more favorable Reasonable Cause outcome.

Procedurally, it is important to argue accuracy penalties during the audit or CP2000 process.  If you do not argue during this process, you give away important appeals rights within the IRS.  In the end, to remove the penalties, you will have to ask for reconsideration of the audit or CP2000 – and that can take months, if not years (or years,) to complete.

Be prepared to appeal

If the IRS denies the abatement (as it often does), be prepared to ask for a timely appeal. Because the IRS looks at many penalty abatement requests in a silo, you will need to provide a big picture to a live person. Specialized appeals officers are trained to see a bigger picture and the totality of the taxpayer’s circumstances. If done correctly, you may get the abatement.

Be prepared with all of your facts, law, and arguments. Provide third-party verification of the taxpayer’s circumstances. Provide a timeline that shows the circumstances outside of the taxpayer’s control and be prepared to show how other aspects of the taxpayer’s life (not just filing and paying their taxes) were affected. For assistance creating a strategy to address your tax issue, visit Jackson Hewitt’s Tax Resolution Hub to see the various ways we can help you.

About the Author

Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.

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