Tag Archives: Penalty Abatement

Penalty Abatements and Penalty Waivers. What are they and how to qualify.

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Penalty Adjustments and Penalty Waivers

The assessment of penalties and interest are methods designed by the IRS and State Tax Agencies to encourage the timely filing and payment of taxes. These charges are imposed when a taxpayer fails to meet a filing deadline or fails to pay a tax amount when it is due. The assessment of a tax penalty is announced through an IRS Letter, an IRS Notice or a similar written notification from a State Tax Agency. The notice must include the name of the penalty, the reason the penalty is being assessed and an explanation of how the penalty amount has been calculated. The IRS Notice and the IRS Letter as well as notices issued by State Tax Agencies are computer generated so often errors occur. It is therefore important to verify that the reported penalty amount is correct before making payment or proceeding with any type of tax settlement procedure.

Since the accumulation of penalties and interest can represent a significant portion of an outstanding tax liability, obtaining a penalty waiver is often one of the most productive and efficient tax settlement options available. That being said, penalty waivers can be difficult to obtain. As with other tax settlement options, they are only granted under certain very specific conditions and they require strict documentation that those conditions have been met.

Normally, a penalty waver will be granted only under a condition that is called Reasonable Cause Relief.  In order meet the requirements of Reasonable Cause Relief, the taxpayer must show (1) that tax filing deadlines were not met or tax payments were not made as the result of some circumstance that was beyond their control and (2) that they took reasonable steps to counter the effects of the uncontrollable event and were still not able to file or pay their taxes.

The short list of events that may satisfy the requirements of Reasonable Cause Relief includes (1) a serious illness or death, (2) a fire, casualty or other natural disaster, (3) the inability to obtain tax records, (4) incorrect advice from a tax professional or (5) incorrect advice directly from the IRS.

In order to obtain a penalty waiver from either the IRS or a State Tax Agency, the taxpayer or their tax settlement representative must first submit a written request for the abatement. Following this, the taxpayer must meet the burden of proof that they acted in a responsible and prudent manner and still were unable to meet their tax obligations. The required burden of proof falls under the following three main headings:

  • The Uncontrollable Circumstances

–          What events happened?

–          When did the events occur?

–          Were the events such that they could not be controlled or anticipated?

–          How did the events prevent the taxpayer from filing or paying the taxes?

 

  • The Correlation Between the Uncontrollable Circumstances and the Late Filing or Payment

–          Did the taxpayer take steps to mitigate the effects of the uncontrollable circumstances?

–          How were other financial affairs handled during the time period in question?

–          Did the taxpayer pay creditors other than the IRS or State Tax Agency during the time period in question?

–          Is there a direct correlation between the uncontrollable circumstances and the late filing or payment of the taxes?

–          Did the taxpayer have a previous record of either late filings or late payments?

  • The Supporting Documentation

–          Is the provided documentation sufficient to show that the conditions for Reasonable Cause Relief have been met?

–          Was the documentation provided by an objective third party?

Since penalties are assessed for the purpose of enforcing compliance and creating fairness within the tax system, they are normally waived only when Reasonable Cause Relief can be documented according to the criteria described above. The procedure for obtaining an abatement of tax penalties is specific and complex and may require the assistance of a qualified tax settlement professional.

If you have been assessed penalties due to an existing tax debt, we can help you determine whether the assessed penalties are accurate and whether you meet the qualifications for a penalty waiver. Our experienced tax settlement professionals can also help you submit your penalty waiver request according to established IRS or State Tax Agency guidelines. For more information about our tax debt resolution services, visit us today at www.professionaltaxresolution.com. Contact us by phone at (949)-596-4143 or by email at info@protaxres.com to receive a free, no obligation consultation.

 

Audited? Overwhelming Penalties & Interest? Request a Penalty Abatement.

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Taxpayers with tax debt soon learn that the actual amount of tax they originally owed the IRS or State is only a part of the amount they now owe overall. The balance may be much larger due to the assessment of penalties and interest. Although many find it shocking, it is not uncommon to balances that have increased by as much as 50% because of penalties and interest.

One of the larger penalties is the “Accuracy Related IRS Penalty”. This large fee is generally 20% of any portion of a tax underpayment which the IRS determines is attributable to one of the following:

1. Disregard or negligence of IRS rules and regulations

2. A substantial understatement of IRS income tax due

3. A substantial valuation misstatement covered under Chapter 1 of the Internal Revenue Code

4. A substantial overstatement of a pension liability

5. A substantial estate or gift tax valuation understatement

When is this penalty assessed? Taxpayers who have gone through an audit often incur an “accuracy related penalty.” Most often this penalty is the result of an audit where it was determined that there was a substantial underpayment of the taxes due at the time of filing.

This is one of the reasons that an IRS Audit can be so intimidating and worrisome. Taxpayers fear not only the tax debt itself but the very significant addition of the penalties and interest.

In these situations, hiring a professional tax settlement firm should be strongly considered. The problem with having significant amounts of tax debt is that outstanding tax debt issues are usually owed to both the IRS and state tax boards for multiple years. Unpaid tax debts resulting in the assessment of the “accuracy-related penalty” are generally also assessed underpayment penalties and multiple other penalties and fees. As if that wasn’t enough, until they are paid in full, all of these balances continue to accrue interest.

Unfortunately these situations can continue to snowball until they are so large and difficult to solve that they require a thorough examination of all tax settlement options, especially for taxpayers that are already in a poor financial situation. There is hope though. A qualified and reputable tax resolution firm can help you determine if you are eligible for IRS penalty abatement. If you are a candidate, it is possible to request an IRS penalty abatement of the assessed “accuracy-related penalty.”

To file this penalty abatement request, the taxpayer must be prepared to demonstrate that the taxpayer “acted in good faith and has reasonable cause”. The determination of whether a taxpayer acted with “reasonable cause” and in “good faith” is made by the IRS on a case-by-case basis. Hiring the right professional to ensure you have a solid case becomes very important as the IRS will take into account all specific facts and circumstances. Probably the most important factor the IRS considers is the extent of the taxpayer’s effort to report the proper tax liability.

If a taxpayer did not keep adequate books and records, they may have a very difficult time claiming to have acted with “reasonable care”. However, a taxpayer who has honestly relied upon the advice of a tax professional, and who has made a “reasonable effort” to assess their IRS tax debt liability, will have a better case even if the advice they received turned out to be incorrect. An honest misunderstanding of fact or law may also be considered “reasonable cause and in good faith” if the IRS feels the misunderstanding is reasonable.

Of course, simply requesting the abatement is not enough and just because you previously relied upon the advice of another or you had an honest misunderstanding of the tax law does not necessarily demonstrate to the IRS that you had “reasonable cause and good faith”. This is why the IRS looks at all of the facts and circumstances when considering a taxpayers request for tax debt penalty abatement.

Talk with your professional tax resolution specialist as it relates to your specific circumstances. Carefully consider all of your tax debt settlement options such as requesting an IRS penalty abatement, entering into an installment agreement, submitting an offer in compromise, and various other alternatives.

Remember, the problem won’t go away, it only compounds so the worst option is to do nothing.

Our licensed experts at Professional Tax Resolution (www.professionaltaxresolution.com) can assist you in determining which tax settlement options are appropriate for you based not only on your tax debt but your financial circumstances as well.