Contesting Tax Penalties: Abatement

In our last post, we discussed a few of the most common tax penalties imposed by the IRS. Here we explain some ways of getting those penalties, and interest, reduced or removed entirely (otherwise known as “abatement”).

It’s bad enough owing taxes, but when penalties and interest are added your bill can become a downright nightmare. Fortunately, there are some circumstances in which tax penalties may be reduced or eliminated entirely.

The Internal Revenue Manual specifies four general criteria for tax penalty abatement: (1) Reasonable cause, (2) statutory and regulatory exceptions, (3) administrative waivers and (4) correction of IRS error.

(1) Abatement for “reasonable cause”

Tax penalty relief on account of “reasonable cause” is generally granted where:

  1. The taxpayer or a member of their immediate family died or suffered a serious illness very close to the tax filing deadline.
  2. The taxpayer exercised ordinary business care and prudence but could not comply with filing requirements or payment demands within the prescribed time limits (e.g., the records were in control of a third party and were not returned in time to file on the due date, the taxpayer simply didn’t have the money, etc.)
  3. The business or tax records were destroyed by fire, natural disaster or another event.
  4. The taxpayer was otherwise unable to properly file or pay their taxes due to circumstances beyond their control.

Reasonable cause penalty abatement is determined following an analysis of all the facts and circumstances of the individual situation. Treasury Regulations provide some examples to help determine if reasonable cause has been established (see Treas. Regs. 1.6664–4 and 326 CFR §301.6651–1(c)). Note that reasonable cause abatement is not available for all tax penalties.

(2) Statutory and regulatory exceptions

In some situations, the law itself allows a taxpayer to have a tax penalty abated. For example, there are statutory provisions that eliminate tax penalties under the following circumstances:

1. Where the tax is a small amount, or for newly retired or disabled taxpayers and others specified in 26 U.S. Code § 6654(e)(1), (2) or (3).

2. If the return was timely mailed, as verified by postmark, per 26 U.S. Code § 7502.

3. It’s the first time that the taxpayer was noncompliant (the IRS first-time IRS tax penalty abatement can be found at IRM §20.1.1.3.6.1).

(3) Administrative waiver

IRS administrative waivers are generally granted where the IRS has experienced a delay in the printing or mailing of forms, or in publishing guidance on a specific topic or issue. In addition, these waivers are often available where there has been a natural disaster or other catastrophic event in the region.

(4) Correction of IRS error

Tax assessments that can be attributed to the IRS including mathematical errors, delays, or erroneous written advice may be abated under 26 U.S. Code § 6404(d), (e) or (f). Penalties may also be suspended where the IRS has failed to contact the taxpayer. Interest that was charged on a penalty may be reduced or removed entirely if the penalty is reduced or removed.

Our San Francisco tax firm can help you resolve your tax liabilities

The tax attorneys, CPAs and other tax professionals at Moskowitz, LLP routinely assist the firm’s clients by implementing a variety of strategies to resolve their tax problems. Contact our office today for a consultation.

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