The IRS often imposes penalties improperly, usually because the IRS employee does not understand the facts of the case, the law, or both. When this happens, it is imperative that you do not meekly accept the penalty as correct but that you fight the issue. There are three common ways to fight the IRS on imposition of penalties:
- Review the penalty prior to the penalty being assessed. You would usually do this review with the IRS employee proposing the penalty.
- Request penalty abatement after the penalty is assessed. You do not have to pay the penalty to do this.
- Pay the penalty and request abatement by filing a claim for refund.
Assuming the IRS does not agree to the first option and removes the penalty before it is ever really asserted, you are left with the abatement process to get the penalty removed.
How The Abatement Process Works
The abatement process is the most common way to challenge IRS penalties. Abatement requests are made after the IRS sends a notice to the taxpayer informing him or her of the penalty. Remember that some abatement requests have a strict time limitation (especially if there is a Notice of Deficiency involved), so you should generally file an abatement request as soon as you discover the existence of an inappropriate penalty.
You begin the process by submitting a Claim for Refund and Request for Abatement (using Form 843) or an abatement letter if the penalty is related to income taxes or "reasonable cause" abatements. Under IRC § 6213 (b) and 6404, the IRS is permitted to abate penalties for errors that the IRS makes with respect to any tax return. On the abatement request form, you should indicate the reasons why the penalty should be abated and attach a copy of the penalty notice along with copies of documentation to support the abatement request, if any documents exist.
If this abatement request is denied, the IRS will send you a letter stating that you have the right to appeal the denial of the request for abatement to the appeals office. If the appeals officer also denies the penalty abatement request, your only remaining choice is to pay the penalty and underlying tax deficiency and file a claim for refund.
Appeal Of A Refusal To Abate Penalties
In all instances you should exercise your right to appeal the IRS' refusal to abate the penalties, as you really have nothing to lose by doing so. The IRS, contrary to what it may inform the public, does abate a large number of penalties every year.
The IRS lists numerous situations in which penalties may not be imposed, all of them centering on reasonable cause. Although the IRC does not define "reasonable cause," the IRS regulations indicate that reasonable cause exists if you exercised ordinary business care and prudence and were nevertheless unable to file the return or pay the tax within the prescribed time.
The IRS has accepted the following as evidence of reasonable cause:
- Destruction of your records
- Family problems, such as divorce or death in the family
- Incarceration or other significant disruption to your life
- Improper advice from tax professional
- Erroneous written advice from the IRS (in this case interest may also be abated)
In sum, an abatement of penalties may be granted if you were victimized by factors beyond your control that caused your tax delinquency and the penalties.
Reasons For Abatement Of Penalties
The IRS has also abated penalties for taxpayers for such reasons as war, hurricanes, dishonest bookkeepers, alcoholism, drug addiction, bad business decisions, simply forgot to file, never did this before, etc.
There are abatements for acts of non-compliance, including:
- Civil fraud penalties
- Negligence penalties
- Penalty for failure to pay estimated tax
- Failure to pay penalties
- Late filing penalties
- Dishonored check penalties
With respect to having the IRS abate interest, the IRS will waive interest that is a result of certain errors or delays caused by IRS employees. To request abatement, complete and submit Form 843, Claim for Refund and Request for Abatement.
Contact Our Knowledgeable Tax Attorney
For a free confidential consultation with an experienced tax lawyer, call Levins Tax Law, LLC, at 508-435-0118 or email our law firm. Our law firm accepts American Express, Visa and MasterCard. We also have offices in Framingham and Boston. Besides Massachusetts, we represent clients across the United States.