Abatement of Penalties

Penalties in the form of interest and other fees are incurred when a taxpayer fails to file a tax return by a filing deadline and/or fails to pay a tax debt when it is due. Although interest and other penalties assessed by the IRS function to create equity within the tax system and encourage compliance, they often impose a significant financial burden on the taxpayer by increasing a taxpayer’s IRS tax debt by as much as fifty percent. When the circumstances are such that a taxpayer has acted in a reasonable and prudent manner yet, because of circumstance beyond his or her control, is unable to meet a tax debt obligation, the IRS may reduce or eliminate the penalties.

The IRS grants the abatement of penalties when “the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.” This is called Reasonable Cause Relief. Essentially this means that something beyond the control of the taxpayer has occurred that caused him or her not to file a tax return or pay a tax debt in a timely fashion. In order to qualify for Reasonable Cause Relief, it must be demonstrated that the taxpayer took reasonable steps to counter the events that resulted in his or her inability to pay and yet was still unable meet the assessed tax obligations.

Unfortunately, despite what some tax relief or tax settlement companies might advertise, abatement through Reasonable Cause Relief is very difficult to obtain. The burden of proof that requisite care and prudence was exercised rests with the taxpayer. In addition, the following prerequisites must be met in order to be considered by the IRS as a candidate for Reasonable Cause Relief:

  • The taxpayer or the tax settlement representative must make a request for abatement.
  • The taxpayer’s situation must be the result of, or closely analogous to, one of the following events:
  1. Inability to obtain necessary records
  2. Serious illness, death, or other unavoidable absence
  3. Fire, casualty, natural disaster or other disturbance
  4. Incorrect advice from a competent tax professional
  5. Incorrect advice, either oral or written, from the IRS
  6. An Act of God.
  • The taxpayer must meet the IRS standards of burden of proof regarding one or more of these events.

A qualified Certified Public Accountant handling a tax settlement case will know and understand the factors the IRS considers when determining whether a taxpayer is eligible for Reasonable Cause Relief and will make sure the case is well prepared before approaching the IRS.

The following is a sample list of questions the IRS may present when making a determination as to whether or not to grant an abatement:

  • What events prevented the timely filing of a tax document or resulted in the late payment of a tax debt?
  • When did the events happen?
  • Why did these events prevent the taxpayer from complying with the tax law?
  • How were other financial affairs handled during the time period in question?
  • Does it appear that the taxpayer paid other creditors and singled out the IRS as the creditor not to be paid?
  • What steps were taken in an attempt to mitigate the circumstances that prevented payment of the tax debt?
  • Is there a direct “timeline” correlation between the extenuating circumstances and the failure to meet the tax debt obligations in question?
  • Is there a history of late payment of tax debt and /or failure to meet filing deadlines?
  • Were the circumstances such that they could not have been anticipated or avoided?
  • What documentation was provided to prove reasonable cause?
  • Was the documentation provided by an uninterested third party?

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