What is Tax Resolution? Part 4 of 4

What is Penalty Abatement?

Tax penalty abatement is defined as the temporary or permanent reduction of one’s tax debt. This may occur by requesting relief from certain federal penalties or interest. It is possible to receive an abatement in several different situations. For instance, an abatement may be afforded if there was an error by the IRS, a delay in your return, or if it is your first offense.  To request an abatement, use Form 843 which can be found on IRS.gov.  Abatement can be the easiest tool overall to save money on past due tax.  It is also the most overlooked cause of action.  For example, if you filed all returns and paid all taxes when they were due, and were not audited or otherwise adjusted, and then you failed to file or pay on time and the IRS hit you with a penalty, then you qualify to have the penalty abated.  This can be done with a simple phone call by an attorney.  It doesn’t matter how much the penalty is, if you qualify, then you do not have to pay that penalty.

First-Time Abatement

If you have a history of filing your tax returns on time, paying your debts, and generally following the IRS rules, you may be eligible for a first-time penalty abatement. First-time abatement may allow a tax payer to avoid IRS penalties such as failure to file penalties and failure to pay penalties. 5 I.R.M. Abr. & Ann. § Consequently, the IRS rewards rule-abiding taxpayers with penalty forgiveness, resulting in savings ranging from hundreds to thousands of dollars.

In order to qualify for first-time abatement, you must not only be current on all your returns, but you must also have not received any significant penalties over the course of the previous three years. Upon request of a first-time abatement, the IRS will utilize a software tool known as the Reasonable Cause Assistant. There has been much criticism and disapproval regarding the system, and often times it may be necessary to contact the IRS directly and request an override of the system.  This can be accomplished with a phone call by an experienced attorney, keeping costs low.

Reasonable Cause Abatement

If you are able to prove that there existed a legitimate reason for why you did not file your return or pay your tax debt, a reasonable cause abatement may be granted. When assessing a request for a reasonable cause abatement, the IRS will look at all the facts and circumstances in your situation. 5 I.R.M. Abr. & Ann. §  Some instances that may allow for a reasonable cause are listed below.  These circumstances come straight from the Internal Revenue Manual, which outlines how IRS employees are to attack problems and requests from taxpayers.  The numbers above the sections are the corresponding IRM sections, and more information can be found by googling those sections.

Ordinary Business Care and Prudence:
Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that he or she exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law.  In determining if the taxpayer exercised ordinary business care and prudence, the IRS will look to:
  • Taxpayer’s Reason:
  • Compliance History:
  • Length of Time:
  • Circumstances Beyond the Taxpayer’s Control:
Death, Serious Illness, or Unavoidable Absence:
Death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family, may establish reasonable cause for filing, paying, or depositing late.
  • Timing
  • Effect on the taxpayer’s business
  • Steps taken to attempt to comply
  • If the taxpayer complied when it became possible
Unable to Obtain Records:
Explanations relating to the inability to obtain the necessary records may constitute reasonable cause in some instances, but may not in others.
The taxpayer must have exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer’s control, he or she was unable to comply.

The IRS will consider:

  • Why the records were needed to comply.
  • Why the records were unavailable and what steps were taken to secure the records.
  • When and how the taxpayer became aware that he or she did not have the necessary records.
  • If other means were explored to secure needed information.
  • Why the taxpayer did not estimate the information.
  • If the taxpayer contacted the IRS for instructions on what to do about missing information.
  • If the taxpayer promptly complied once the missing information was received.
  • Supporting documentation such as copies of letters written and responses received in an effort to get the needed information.
Mistake was Made:
The taxpayer may try to establish reasonable cause by claiming that a mistake was made. Generally, this is not in keeping with the ordinary business care and prudence standard and does not provide a basis for reasonable cause. However, the reason for the mistake may be a supporting factor if additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply within the prescribed time frame. 
Erroneous Advice or Reliance:
Certain sections of the IRC and treasury regulations provide relief from certain penalties based on erroneous advice. The taxpayer may try to establish reasonable cause by claiming he or she relied on another party to comply on his or her behalf. Generally, this is not a basis for reasonable cause, particularly for filing or paying obligations, since the taxpayer is responsible for meeting his or her tax obligations and that responsibility cannot be delegated. However, if the advice caused the taxpayer to fall into one of the other categories of reasonable cause, this can strengthen a request.  
Ignorance of the Law:
In some instances taxpayers may not be aware of specific obligations to file and/or pay taxes. Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances.
In conclusion, Abatement can be a fantastic tool to add on to other services. It is also generally overlooked by many practitioners.  An experienced attorney can request first-time abatement via telephone on most penalties, but reasonable cause must be established via evidence and a written request to the IRS.  By utilizing the IRM and statutes, a reasonable cause request can be tailored to fit the law and provide a much higher chance of acceptance.  This is why it is important to hire an experienced attorney.  If you think that you may qualify for abatement of a penalty as listed above, please do not hesitate to contact our office.  Please visit our website here.  Thank you for reading this series, and be on the lookout for more information soon.