Most clients who come into the office with tax issues are stunned when they look at the tax liabilities assessed by the IRS. These liabilities are made up of the underlying tax owed along with penalties and interest charges. It is these substantial penalty and interest charges that catch most of our tax clients by surprise. And these penalty and interest charges continue to accrue until they are statutorily stopped, or the underlying tax is paid in full.
However, in certain circumstances, you may be entitled to having certain penalties assessed by the Internal Revenue Service abated from your tax liability. The two most common circumstances for penalty abatement are: 1. First Time Penalty Abatement and 2. Abatement due to reasonable cause.
First Time Penalty Abatement
The IRS can administratively provide penalty relief to certain taxpayers. Such relief from failure to file penalties, failure to timely pay penalties and/or failure to deposit taxes can be requested if the following criteria are satisfied:
Taxpayer didn’t previously have to file a return or taxpayer has no penalties for the three tax years prior to the tax year in which relief is sought;
Taxpayer filed all currently required returns or has filed an extension of time to file the returns;
Taxpayer has paid or arranged to pay any tax liabilities.
Ultimately the IRS will look to see if you were in compliance prior to the year in which relief is sought, whether you are currently in filing compliance with the IRS, and whether you have entered into a payment agreement concerning any tax liability with the IRS. If relief is granted administratively any interest charged on the penalty will also be reduced or removed.
First time penalty abatement is a wonderful program offered by the IRS. We here at Lake Shore Legal can assist you in reducing your tax liability by seeking this penalty relief. In many circumstances the penalty abatement can be a significant savings.
Penalty Abatement for Reasonable Cause
Penalty abatement can also be granted if the Taxpayer can show reasonable cause for the underlying issue. Such relief is not granted as easily as the First Time Penalty Abatement, but with the proper advocacy, relief based upon reasonable cause can be sought.
The Internal Revenue Code states that there is a reasonable cause exception to the failure to pay, failure to file, and failure to deposit penalties. A taxpayer cannot be held liable for these penalties if the failure is “due to reasonable cause and not due to willful neglect.” IRC §6651(a)(2). The Commissioner of the IRS properly abates delinquency penalties if the taxpayer can establish reasonable cause for his actions. Regulation Sec. 301.6651-1(c)(1).
Reasonable cause can be established by several factors. In a business context, the analysis is centered upon whether the taxpayer utilized the prudence and care of an ordinary business person but was nevertheless unable to perform the act required of him.
A disability or illness of the taxpayer are also strong reasonable cause arguments. Under IRM 20.1.1.3.1.2.4(1)(a), serious illness of the taxpayer may establish reasonable cause for penalties assessed against the taxpayer. The factors relevant to this analysis are:
The dates, duration, and severity of the illness
How the event/illness prevented compliance
If other requirements were impaired; and
If tax duties were attended to promptly by the taxpayer after the illness passed.
The strongest argument for reasonable cause penalty abatement is reliance by the taxpayer upon the advice of a professional. Most individuals seek out a tax return preparer or a certified public accountant to prepare and file tax returns. Most individuals will seek out a certified public accountant or tax attorney to seek guidance and advice on how to properly treat a certain financial transaction or situation. The US Supreme Court has found that “most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the accountant/attorney, to seek a ‘second opinion’ or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place.” US v. Boyle 469 US 241, 251 (1985).
In Boyle, the Supreme Court ultimately held that a taxpayer who sought out professional guidance but was instructed incorrectly should not be held liable for the penalties resulting from the improper advice. In most situations where an individual comes into this office seeking relief, it is this court decision and the facts of this court decision that make the strongest argument to the IRS that the taxpayer did not act willful but acted upon the instruction of an expert in the tax field.
Lake Shore Legal, LLC
If you have a tax liability owed to the IRS, contact Lake Shore Legal today and allow our attorneys to assist you. Lake Shore Legal can review your filing history and determine whether you are entitled to administrative relief under the First Time Penalty Abatement program. Our attorneys can also assist you in drafting and requesting penalty relief under the reasonable cause exceptions briefly discussed above and other factors that may be relevant to your individualized set of facts.
Lake Shore Legal is here to assist you in getting into filing compliance with the IRS. Further, our attorneys can advise you into whether entering into a monthly payment arrangement is in your best interest or whether you may qualify for the IRS Offer in Compromise program.
If you are having tax difficulties or have been contacted by the IRS concerning a tax liability contact Lake Shore Legal. We are here to assist you before the IRS and state taxing agencies. info@lakeshorelegalsolutions.com; (508) 943-7800