Sam Brotman, JD, LLM, MBA October 7, 2020 30 min read

Am I Eligible for a IRS Tax Penalty Abatement?

As  previously noted, the purpose of (assessing) a penalty is to encourage voluntary compliance. “Voluntary compliance exists when taxpayers conform to the law without compulsion or threat” (IRS.gov, “20.1.1.2.1 Encouraging Voluntary Compliance,” 8/14/2013). The taxpayer supports the tenets of the Internal Revenue Code in achieving voluntary compliance when he or she makes a good faith effort to meet all tax obligations (“Encouraging Voluntary Compliance”).

Within this context, the taxpayer is deemed compliant when they respond to written materials outlining the tax rules and complete all forms relevant to their tax liability. To encourage taxpayer self-compliance, the IRS fairly, consistently and accurately administers a system of penalties (“Encouraging Voluntary Compliance”). The IRS also educates taxpayers to encourage future compliance.

Reasonable Cause

When a taxpayer provides an explanation to support their request for relief, the IRS waives and/or abates the applicable penalty. “If the explanation applies to one (or more) penalty(s) but not all penalties, only the penalty(s) to which the explanation applies should be waived or abated” (“Part 20”). 

When relief is granted, particularly after the assessment of the penalty, the appropriate portion(s) of the penalty is abated. However, adjustments due to reasonable cause fall under specific guidelines.

Section 20.1.1.3.2 of the Internal Revenue Manual defines reasonable cause within the context of the taxpayer failing to comply with their tax obligations and the granting of relief because the taxpayer “exercised ordinary business care and prudence in determining their tax obligations” (IRS.gov, “20.1.1.3.2 Reasonable Cause,” 8/14/2013). 

Reasonable cause relief is usually granted under these circumstances (“Reasonable Cause”). Reasonable cause is defined within penalty sections of the Internal Revenue Code as the evidence required by the taxpayer that he or she “acted in good faith or that the taxpayer[’s] failure to comply with the law was not due to willful neglect” (“Reasonable Cause”). 

In essence, a taxpayer may have reasonable cause when evidence of their conduct justifies non-assertion or abatement of penalty (“Reasonable Cause”). Cases are judged individually; judgments are based upon presented evidence, facts, and circumstances.

When evaluating the merits of a case, specific criterion is used to determine the taxpayer’s culpability. For example, a specific question that the IRS might use centers on determining what attempt(s) the taxpayer made to comply once all facts and circumstances changed. 

This question, among five others, helps the IRS to evaluate the taxpayer’s decision-making abilities to determine if “circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law” (“Reasonable Cause”).

The Internal Revenue Manual outlines how reasonable cause and other relief provisions are applied within the context of effective tax administration. The provisions must be applied in a “consistent manner and should conform with the considerations specified in the IRC, Treasury Regulations (Treas. Regs.), Policy Statements, and IRM Part 20.1, Penalty Handbook” (“Reasonable Cause”).

It is important to note that reasonable cause relief is not always available for all penalties. For example, a reasonable cause provision may only apply to a specific section of the Internal Revenue Code. In addition, acceptable explanations are not just limited to those outlined within section 20.1 of the Internal Revenue Manual. 

In essence, penalty relief is typically considered when findings reveal that the taxpayer exercised ordinary business care and prudence even though unable to comply within a prescribed time frame. However, once the facts and circumstances reveal that the taxpayer willfully neglected to comply with his or her tax obligation(s), reasonable cause ceases to exist (“Reasonable Cause”).

Tax Penalty Abatements – Reasonable Cause Factors

My clients often get frustrated and take it personally when they receive a tax penalty from the IRS on top of their balance due.

Tax penalties can substantially increase a balance that is owed to the IRS (coupled with the interest on top of those penalties) and turn a relatively small balance into a much larger one. Furthermore, the IRS takes a hard and fast approach when assessing tax penalties and will often assess the penalties without regard to the underlying circumstances.

Overview of reasonable cause

Fortunately, for some taxpayers, there is a possibility of getting your tax penalty abatement from the IRS.

Tax penalty abatements are somewhat difficult to get accepted, as the IRS does not simply like to discharge them without some justifiable cause. However, there are a number of “reasonable cause” factors that have been codified by the Internal Revenue Manual that taxpayer’s can use as a basis for challenging their tax penalty. 

As defined by the IRS, a tax penalty abatement is generally granted when the taxpayer exercises ordinary care and prudence, but nevertheless fails to comply with their obligations.[1] For the sake of my readers, I have listed the reasonable cause exceptions to tax penalties below.

Keep in mind that this is not an exhaustive list of the circumstances that a taxpayer can use to get a tax penalty abatement. However, as they are listed in the Internal Revenue Manual, these are the circumstances that I have found in my experience that the IRS is most likely to accept.

Any reason or rational outside of these factors will be much more difficult for the IRS to justify reasonable cause.

Tax penalty abatement factor 1 – Ordinary business care and prudence (IRM 20.1.1.3.2.2)

Ordinary business care and prudence can be demonstrated by showing that the taxpayer made every effort to comply with their tax obligations, but nevertheless for circumstances beyond their control were unable to do so.

The IRS typically looks at four factors when deciding to abate a tax penalty because of reasonable cause.

  • First, the taxpayer should have a compelling reason for seeking the penalty abatement. All appropriate explanations should sync with the dates and circumstances on which the penalties were based.
  • Second, the IRS looks at the compliance history of the taxpayer. Not to say that taxpayers with past non-compliance issues will be denied tax penalty relief, but sometimes bad behavior can weigh negatively on the taxpayer’s circumstances.
  • Third, the length of time that it took for the taxpayer to become compliant must be reasonable under the circumstances
  • Finally, the circumstances cited as the underlying reason for tax penalty abatement must be truly beyond the taxpayer’s control 

The IRS will closely look into all of these factors and may request substantiating documentation from the taxpayer in order to validate the sequence of events claimed by the taxpayer.

Tax penalty abatement factor 2 – Death, serious illness, or unavoidable absence (IRM 20.1.1.3.2.2.1)

Any death, serious illness, or otherwise serious medical condition is probably one of the best methods to justify a tax penalty abatement from the IRS. This applies both to individual taxpayers (or their family members) and corporate taxpayers when the person solely responsible for a company’s tax compliance obligations is absent.

In situations where a corporation is involved, the IRS will also look at steps that the company took, in light of this condition, to exercise ordinary business care and prudence. Although nobody enjoys sharing personal details with the government, it is important to document the condition that caused the lack of compliance as much as possible.

This includes dates, details related to:

  • Severity of the condition
  • Relationship of the taxpayer to the individual afflicted with the condition (if not the taxpayer)
  • Any other details that might be relevant to the IRS when making your case
  • Keep in mind that a human being will eventually be reviewing the facts and circumstances surrounding your tax penalty abatement.

There is nothing wrong with asking for sympathy from the IRS in your tax penalty abatement request.

[1] See IRM 20.1.1.3.2: http://www.irs.gov/irm/part20/irm_20-001-001r.html

Tax penalty abatement factor 3 – Ignorance of the law (IRM 20.1.1.3.2.2.6)[1]

Although this factor is more difficult to use as a reasonable cause argument, ignorance of the law is still a factor that the IRS may consider when determining the validity of a tax penalty abatement.

Some taxpayers, because of their education or past background, may not be aware of the requirement to file and pay certain types of tax obligations. As long as the taxpayer makes a reasonable effort to be compliant, then they can present an argument that they should not be penalized as a result of ignorance of the law.

When making their determination, the IRS will look at a taxpayer’s educational background, whether or not they have been exposed to this type of tax before, whether they have been penalized before (the kiss of death for this argument), and if there were recent changes to the law, the reporting requirements, or the forms that the taxpayer would reasonably not be expected to be aware of.

However, in my professional opinion, ignorance of the law does not play well with the IRS, which believes that a reasonable effort to understand the law should mitigate any ignorance on the part of the taxpayer. It is best that if you are going to attempt a tax penalty abatement that you principally rely on the other factors, rather than making this one your main argument.

That said, ignorance of the law can be combined with other factors to strengthen your position.

Tax penalty abatement factor 4 – Forgetfulness (IRM 20.1.1.3.2.2.7) and mistakes (IRM 20.1.1.3.2.2.4)[2]

Forgetfulness

It is my professional opinion that a tax penalty abatement should not be attempted on the basis of forgetfulness and you are better off not citing this in your reasoning for a penalty abatement than trying to make this argument to the IRS.

Forgetfulness, by nature, does not suggest to the IRS that you exercised reasonable care and prudence in trying to comply with your tax obligations. The IRS even states in the IRM that reliance on another to comply with your obligations or oversight on your own behalf is generally not sufficient to establish reasonable cause.

Mistakes

Mistakes are only slightly less dubious, although the IRS is also quick to note that making a mistake is not suggestive of ordinary care either. As such, I think you are better off forgetting that these factors exist and pursuing other avenues to try and argue your tax penalty abatement.

Tax penalty abatement factor 5 – Unable to obtain records (IRM 20.1.1.3.2.2.3)3]

This is a double-edged sword, but I have personally had several successful tax penalty abatements accepted on the fact that the taxpayer could not obtain the necessary records to comply with their tax obligations.

The failure to have the necessary records to file argument hinges essentially on:

  1. How reasonable the failure to have the records in question was 
  2. Whether or not the records in question were under the control of the taxpayer

However, the only thing worse in the eyes of the IRS than not filing is filing something that is not accurate.

Waiting until you have all the necessary information so that you can file a proper and accurate tax return is suggestive of diligence on the part of the taxpayer. However, your argument will also depend on how long you knew you did not have the records in question and what efforts you made to correct the deficiency when you found out about it.

Although the use of this argument for a tax penalty abatement is fact dependent, it can be one of the more successful arguments for getting tax penalties abated.

 [1] http://www.irs.gov/irm/part20/irm_20-001-001r.html

[2] http://www.irs.gov/irm/part20/irm_20-001-001r.html

[3] http://www.irs.gov/irm/part20/irm_20-001-001r.html

Tax penalty abatement factor 6 – Undue hardship (IRM 20.1.1.3.3.3)

Undue hardship is another factor that the IRS may use to abate a tax penalty. The IRS defines an undue hardship as something that is “more than an inconvenience to the taxpayer.[1]”

In reality, this means that the taxpayer must show and document some severe financial or personal catastrophe in order to get a tax penalty mitigated as a result of an undue hardship. As a practitioner, I can tell you that this is a fairly difficult feat to accomplish. 

There are very few circumstances that the IRS will consider severe enough to warrant non-payment of taxes and that is usually limited to:

  1. Severe detriment to personal health (cannot pay medical bills)
  2. Loss of primary residence (cannot pay rent) or detriment to minor children or dependents (cannot pay their food, housing, or medical expenses)

Barring anything outside of these two factors, the IRS is unlikely to consider your rationale behind an undue hardship sufficient.

One other thing that is important to note, is that undue hardship generally constitutes an appropriate rationale where items were tied to a failure to pay. However, the IRS generally does not excuse penalties associated with a taxpayer’s failure to file because of an undue hardship.[2]

According to the IRS, financial detriments generally do not impact the taxpayer’s ability to file. However, I have been personally successful in releasing penalties associated for a failure to file because of an economic hardship.

In my opinion, I think what is really important is the surrounding circumstances behind the taxpayer’s request. Regardless of which penalties they are applied to, good facts and rationale will overcome most IRS objections.

Tax penalty abatement factor 7 – Bad advice (IRM 20.1.1.3.3.4) and errors by the IRS (IRM 20.1.1.3.4)

I will not go so far as to say that receiving bad advice is a slam-dunk for getting penalties mitigated, but bad advice, whether from the IRS or from a tax practitioner, is one of the most compelling reasons to abate tax penalties.

Throwing someone else under the bus is a frequently used tactic by tax practitioners for abating penalties in other areas, such as in an audit. Reliance on an expert or from something that the IRS tells you is indicative of the ordinary care and prudence that the IRS is looking for when granting a tax penalty abatement. 

Logically, if the IRS tells you something, you rely on that something, and you are negatively penalized for it, then they should mitigate any penalty associated with their mistake.

In comparison, reliance on a tax advisor is also indicative that you are admitting ignorance when it comes to certain tax matters and trusting someone who is formally trained in such matters. 

The only place where reliance on a tax advisor would be unreasonable is where the blame falls squarely on the taxpayer (negligence) or the IRS is able to prove some financial sophistication and that the taxpayer should have known better.

However, generally this is a great tactic to use, facts permitting.  Similarly, if the IRS makes a mistake, in most cases they will mitigate any penalties associated with their error without much of a fight by the taxpayer.

Tax penalty abatement factor 8 – Fire, flood, or casualty (IRM 20.1.1.3.3.5)

The IRS, without question, generally accepts any tardiness in filing or paying taxes due to a fire, flood, tornado or other casualty. Particularly in areas where there is a state- declared or federally-declared disaster area, the IRS will usually mitigate tax penalties without question.

However, like many of the other factors, the extent of the mitigation will depend on the circumstances and the reasonableness of the taxpayer’s request. The IRS will want any past due returns or payments made as soon as possible. If the taxpayer can demonstrate this, then they should be able to get penalties abated without question.

[1] http://www.irs.gov/irm/part20/irm_20-001-001r.html#d0e1042

[2] http://www.irs.gov/irm/part20/irm_20-001-001r.html 

First Time Penalty Abatement Program

The First Time Penalty Abatement Program relief is a one-time consideration that is applied to a first-time penalty charge. The penalty relief is based upon the taxpayer’s compliance history.

Taxpayers may qualify for First Time Penalty Abatement Program relief by having their penalties for filing and paying late abated. Abatement applies under general conditions. For example, the “IRS is required by IRC 6404(f) and Treas. Reg. 301.6404–3 to abate any portion of any penalty attributable to erroneous written advice furnished by an officer or employee of the IRS acting in their official capacity”.[1] If the taxpayer doesn’t qualify under this provision, the taxpayer may qualify for penalty relief under reasonable cause.

If the IRS determines that the taxpayer “exercised ordinary business care and prudence in relying on the IRS’s written advice,” then the taxpayer may qualify for penalty relief.

The taxpayer must file a request for penalty relief “within the period allowed for collection of the penalty or addition to tax, or if the penalty or addition to tax has been paid, within the period allowed for claiming a credit or refund of such penalty or addition to tax.”

For this reason, under the First Time Penalty Abatement Program, if the taxpayer relied on erroneous oral advice from the IRS, the IRS would be required under the referenced statute to abate any portion of the penalty. “Administratively, the IRS has extended this relief to include erroneous oral advice when appropriate”.[2] 

Taxpayers are instructed to contact the IRS directly for assistance. Communication between the taxpayer and the IRS will help to alleviate questions surrounding willful neglect. Although penalties for filing late will be abated, interest charges will not be abated. Instead, they will “continue to accrue until all assessed tax[es], penalties, and interest[s] are paid in full”.[3]

Typically, the initial request for relief may occur during or after an examination. In fact, the initial request for relief occurs before the penalty is assessed and is applicable to those returns filed or paid late “or after assessment of the penalty and notification issued to the taxpayer”.[4] 

All requests[5] are evaluated for their own individual merit to determine 1) events and parties involved, 2) whether the taxpayer exercised ordinary business care and prudence, or 3) if another type of penalty relief[6] could be applied.

With this in mind, the taxpayer’s obligation is ongoing. “Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late”.[7] Evaluation of the taxpayer’s initial request for penalty relief includes a review of the statement addressing the penalty, payment patterns of preceding years and overall compliance history, and the length of time between events.

In some cases, penalty relief may not be appropriate where a taxpayer has failed to comply with the filing requirement as a result of a death of a family member occurring a significant amount of time before the due date of the return, where a taxpayer claims that he or she was unable to meet the filing requirement “because the records necessary for filing were in the control of a third party,(i.e., a bankruptcy trustee or an accountant.) 

The records were returned to the taxpayer well in advance of the time the return was required to be filed. [In essence,] [t]he return was not filed until several months after the records were returned”.[8] The aim of the review (of the penalty relief request) is to determine “if the taxpayer could have anticipated the event that caused the non-compliance”.[9]

The First Time Penalty Abatement Program policy provision does not apply to returns that are based upon an event. Forms and tax returns that fall under this provision include those such as Form 706, U.S. Estate Tax Return, Form 709, United States Gift (and Generation – Skipping Transfer) Tax Return, and Form 1120, U.S. Corporation Income Tax Return. To request a first-time abatement, taxpayers are required to use Form 843, Claim for Refund and Request for Abatement.[10]

[1] IRS.gov, “Part 20. Penalty and Interest, Chapter 1. Penalty and Handbook, Section 1. Introduction and Penalty Relief,” 7/26/2013)

[2] Id.

[3] Id.

[4] Id.

[5] Subsequent requests for penalty relief are typically received after the initial request for relief has been denied and are viewed as appeals to the previous relief denial (“Part 20”).

[6] The Internal Revenue Manual (IRM) references Statutory or Regulatory Exception or an Administrative Waiver as two such types of penalty relief.

[7] IRS.gov, “Part 20. Penalty and Interest, Chapter 1. Penalty and Handbook, Section 1. Introduction and Penalty Relief,” 7/26/2013)

[8] Id.

[9] Id.

[10] Form 843, Claim for Refund and Request for Abatement is available here: http://www.irs.gov/pub/irs-pdf/f843.pdf.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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