The Basics of Penalty Abatement Overview
If you're looking for more insight into the basics of penalty abatement this course hosted by Tanya Baber EA, CTRS, NTPI Fellow will give you an overview of the penalties, specifically the ones you’re more likely to encounter in your practice, and go over the IRM Part 20 and give you the tools so you know where to look for what you need.
Don’t fret if you don’t know what that is, it just means you’re in the right place now! We’ll go over what the RCA is and why that is important to this process, and the First Time Abate Program and what Reasonable Cause Considerations are.
Number of Penalty Provisions Increasing
- 1955 – 14
- Today – 150+
- Continues to Grow
Designed to encourage compliance
- May cause liability to increase substantially
Penalties range across every type of tax
Most common penalties in practice:
- Estimated tax penalty
- Collection related
- Accuracy related
A few other types
- Preparer penalties
- Civil Penalties
- Ex: Failure to file information returns
IRM Part 20- Penalty & Interest
Estimated Tax Penalty
- Treated more like interest
- Rate of this is same as current interest rate
- Underpayment of tax rate (5% 2020)
- Short term Fed + 3%
- 1 st Quarter 2020 Short Term Fed is 1.5%, then rounded (note – Short term fed rates dropping, so 2020 may change)
Failure to File (FTF) Tax Penalty
IRC §6651 (a)(1)
- Failure to file required return by due date (including ext)
- Accrues 5% for each month (or partial month)
- Up to five months
- At that point reaches maximum of 25%
- Beware minimum penalty too
- $435 IRC §6651(a)(3)*
- Unless tax owing is less – then penalty equals tax 100% *
- <$200 less than 5 yrs ago – indexed each year
Failure to Pay (FTP) Tax Penalty
IRC §6651 (a)(2)
- If full amount of tax balance is not paid by original due date
- .5% of unpaid tax Accrues 5% for each month (or partial month)
- Continues accruing until it reaches 25% max
Remember: An extension of time to file does NOT allow an extension of time to pay!
If BOTH the FTF and FTP apply then:
- Penalty cannot exceed 47.5% of unpaid tax
- IRM 18.104.22.168.7.3
- However, it’s nearly 50% of unpaid tax assessed
- If not in compliance with filing / Paying
- Interest is added on top of penalty too
- Can end up being substantial!
Failure to Deposit (FTD) Penalty
IRC §6656 (b)
- If IRS does not receive required deposit (Payment) on time
- In correct amount
- Paid in correct manner
- 1 to 5 days late: 2% penalty
- 6 to 15 days late: 5% penalty
- 15 or more days late: 10% penalty
- If still unpaid 10 days after notice: 15% max
- If required to be by EFT: Another 10% could apply
Artificial Intelligence IRM 22.214.171.124.6 (11-21-2017)
- ‘Decision support interactive software program’
- RCA determines if penalty relief will be granted
- Possible for an agent to override if necessary
- Often they may not know about this
Agent to perform other case research first
- Apply missing deposit/payment, adjust tax, research missing extension, etc.
- FTF, FTP, FTD
- Others are possible too, but if oral/written, still run through RCA software
Many references in IRM to RCA
- Sometimes success = persistence
- different attempts may produce a different result)
- If you haven’t discovered the IRM yet
- What are you waiting for?
- (Consider NTA 2017 annual report identifying IRS employee training as one of most serious problems)
FTA (First Time Abate) Program
FTA Available for 3 penalty types IRM 126.96.36.199.3.2.1
- FTF (Failure to File)
- FTP (Failure to Pay)
- FTD (Failure to Deposit)
- Files timely, but bal due – NO Payment
- Files late with payment (Full or partial)
- Files late – NO Payment
- Fails to file (SFR Prepared)
- Audited – additional tax assessed
Designed as one-time option
- Tax period is 2001 or after
- Taxpayer is in compliance (filed all required returns)
- Owes and arranged payment (IA / Ext of time/intent)
- Or if no balance outstanding made payments against balances due in last 2 years (RSED)
- Three years prior to penalty are clean
- No FTF / FTP assessed (Must be $0.00)
Obtain IRS transcripts for client
- Taxpayers can access own transcript, or others too
- Anyone enrolled in IRS e-Services can pull transcripts using just 8821
- Circular 230 practitioners (EA, CPA, Attorney) can pull with 8821 or 2848
- Dates for best FTA – 1990-2023 – Compliance / Opportunity (but 1998 min)
Note: taxpayers can pull own transcript, but usually only 10 years. May not give benefit if these 10 yrs don’t qualify – but what if there’s a great one going 15 years back…
Practitioner: How to obtain transcripts
- Call IRS – request copy (Temp fax restrictions, e-Services secure mailbox)
- PPS – Practitioners only – 866-860-4259
- Or e-Help (Practitioners only) 866-255-0654
- Use e-Services to pull transcripts (Store in e-Services mailbox)
- View, print, or download to import into Excel
- Can perform searches in Excel this way for codes or descriptions
Perform searches in each year if by hand
- Excel search for penalty codes/descriptions
- Specific transaction codes indicate a penalty
Easiest option: Use commercial software tool, like Canopy or THS (Tax Help Software) to download transcripts
- Software tools analyze transcripts and provide convenient reports
- BIG advantage – easy to see ALL FTA opportunities!
When contacting IRS for FTA
Practitioner: Be sure you have POA (2848)
- Selected year to want to request FTA
- AND 3 years prior to that year too
Call / Write to IRS (or help taxpayer)
- To Call IRS: PPS – 866-860-4259 General line 800-TAX-1040
Ask for First Time Abatement
- For SPECIFIC tax year
- Will use RCA software
- *note ‘manual’ review instructions for agent*
Should receive an answer immediately
- If approved, will go through script with you
- Will receive a letter (3503C)
- Based on good history of timely filing/paying
Bonus: May also reduce interest if base penalty amount reduced
Reasonable Cause Considerations
Basically our “Good Excuse” (IRM 188.8.131.52.2)
- Can request by phone but there are dollar thresholds
- If the request exceeds – can still send written request
- Will use RCA software
- Many types of Reasonable Cause outlined IRM
- (Best to reference whenever possible)
- Ordinary Business Care and Prudence
- Making provisions to meet obligations when reasonably foreseeable events occur
- Facts & Circumstances – establish exercised a ‘degree of care that a reasonably prudent person would’ but were unable to comply with the law
- Taxpayer’s Reason
- Compliance History
- Length of Time
- Circumstances beyond taxpayer’s control
- Death, serious illness, or unavoidable absence
- For taxpayer or immediate family only
- Example: Spouse, sibling, parents, grandparents, children
- Corporation / Estate / Trust – those with sole authority
- The issue must be addressed in a reasonable time after death or illness
- Show it caused other obligations to also be impaired (not just the taxes)
- May need written proof of illness or death
- Examples: terminal illness, surgery, substance or physical abuse, depression, disability, and emotional or psychological distress 3
- Fire, casualty, or natural disaster
- Major disasters include hurricane, tornado, earthquake, flood, riot, casualty, or other ‘emergency’ or disturbance
- Timing, effect, what steps were taken to comply?
- Did they comply as soon as it was possible?
- Also – consider if it creates other reasonable causes
- For example, a fire may cause ‘unable to obtain records’
- If hospitalized due to accident ‘death, serious illness or unavoidable absence’
- Or a declared natural disaster – IRS issues special instructions making relief available specifically for the event
- Consider – COVID-19 – Declared emergency – May carry special relief instructions not yet released
- Unable to obtain records
- Was ordinary business care & prudence exercised?
- Why were the records unavailable?
- Why were these records needed to comply?
- When and how did they become aware they didn’t have the necessary records?
- What other means were explored to secure the information?
- Why didn’t they just estimate the information?
- And did they comply as soon as the missing information was obtained?
- Taxpayer subject to a mistake that was made
- Generally, this does NOT keep with the ‘ordinary business care and prudence standard and doesn’t support reasonable cause
- However – Facts & Circumstances may illustrate they did comply
- When/how did they become aware of the mistake?
- How did they attempt to correct?
- The relationship between taxpayer and person relied on
- If a mistake was not their own and they delegated the duty
- Did they take timely steps to correct the mistake after it was discovered?
- Relied on erroneous advice
- IRM 184.108.40.206.3.4 – Advice – Possible Statutory exception or administrative waiver
- Relates to issues to technical/complicated for a layperson
- Did they hire a preparer/consultant – what is their level of understanding & knowledge (Tax Advisor – IRM 220.127.116.11.3.4.3)
- Even if they hire someone, still responsible for reporting income to the person hired
- Specific relief from accuracy-related pen IRC §6662
- Was it due to a change in the law?
- Were they unable to have access to their own records?
- What is the taxpayer's own education level?
- Also if written or oral advice from IRS
- Written: IRM 18.104.22.168.3.4.1 – Oral: IRM 22.214.171.124.3.4.2
- IRS required to abate penalty attributed to erroneous written advice provided by IRS
- That has been extended to include oral advice if appropriate
- However – if they do not meet the criteria, may still qualify if they show ‘ordinary business care & prudence’
- Was it reasonable to rely on advice?
- Is there a clear connection – situation – advice – penalty?
- Prior history of tax compliance?
- Any supporting documentation?
- If oral – documentation? ID, date, notes, method obtained?
- The taxpayer was ignorant of the law
- What is their educational level?
- Have they ever been subject to the tax before or penalized?
- Were there any recent tax law changes?
- What is the level of complexity of the issue in question?
- Did the taxpayer show a reasonable good faith effort to comply?
- Unaware of requirement and could not be reasonably expected to know
- Generally NOT keeping with ‘ordinary business care and prudence
- Taxpayer responsibility to timely file/pay and cannot be delegated
- Did an oversight by them or another party caused the noncompliance?
- Facts and circumstances will be reviewed
- However, not good to rely on this as the sole method of establishing reasonable cause
- Undue Financial Hardship
- Administrative waiver / consider proactively as well
- May support extension of time to pay
- Must be more than an inconvenience to the taxpayer
- Extension of time: Form 1127 – Application of Extension of time for payment of tax due to undue hardship
- More than an inconvenience – Treas. Reg. 1.6161-1(b)
- Show they would sustain substantial financial loss if required to pay tax on the due date
- Only affects failure to pay (not a failure to file)
- Financial records required to prove
- Review ‘discretionary expenditures’
- Were there unanticipated events or a bankruptcy?
- When did they know they could not pay?
- Did they explore other means to secure the necessary funds?
Contact IRS by phone or written request
- Use software to help with the determination of eligibility for penalty abatement
- Use form letters to craft written request
- Use a script to assist in calling an agent
Call / Write to IRS (or help taxpayer)
- Taxpayer: 800-829-1040
- Professional (only under 2848) *no request under 8821*
- PPS line – 866-860-4259
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