Tax penalty abatement factor 3 – Ignorance of the law (IRM 18.104.22.168.2.2.6)
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 22.214.171.124.2.2.7) and mistakes (IRM 126.96.36.199.2.2.4)
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 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 188.8.131.52.2.2.3)
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:
- How reasonable the failure to have the records in question was
- 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.
Tax penalty abatement factor 6 – Undue hardship (IRM 184.108.40.206.3.3)
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.”
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:
- Severe detriment to personal health (cannot pay medical bills)
- 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.
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 220.127.116.11.3.4) and errors by the IRS (IRM 18.104.22.168.4)
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 22.214.171.124.3.5)
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.
Penalties are the IRS’ way to punish taxpayers for not paying their taxes in the full amount due on time. Face it. If you owe a significant amount to the IRS and you are struggling to pay it, adding penalties on top of the principal and interest just does not seem fair. Like it or not, you have to figure out a way to pay, but the strategy is to whittle down the amount as much as (legally) possible and getting rid of the penalties is one tactic I have successfully used for my clients.
Did any of the reasonable causes I laid out resonate with you? If so, we need to talk. Give me a call and we can figure out how we can convince the IRS to grant you a tax abatement. It will not be an easy process, but definitely worth a try. You could possibly shave hundreds or thousands of dollars off your tax bill.