That is one of the most common questions that I receive from my clients and there is no simple answer for it. The only answer is...it depends! So what does it depend on?
It depends on the what penalties are assessed and it depends on reasonable cause. Certain penalties are assessed by the examination function of the IRS (think audit and Revenue Agent) and other penalties are assessed by the collections function (think levies, liens and Revenue Officer), however it mainly depends on your reasonable cause.
Reasonable Cause is an event or circumstance beyond your control that prevented you from being able to comply with tax law. Meaning the cause prevented you from either being able to file the return, file it correctly and accurately, prevent you from paying the tax owed, or a combination of any of those types of events. Some examples of reasonable cause are the following.
Medical condition (includes addictions) that does not allow you to file/pay your taxes (needs to also impair the client’s ability to maintain other aspects of their life: e.g. personal finances, ability to work, ability to obtain professional advice, etc.)
Documentation includes: medical notes from physicians, medical bills, other financial bills/bankruptcy, disability claims (SSA), lack of income, lack of employment, etc.
A reliance on a tax professional or other professional for your tax preparation, tax deposits, and tax filings (includes incorrect advice if the client can show the advice received, e.g. in writing).
Documentation includes: Engagement Agreement with the professional, lawsuits filed against the professional, if the professional was an employee- documentation on the dismissal of the employee and analysis of reasons for dismissal that relate to tax non-compliance, etc.
An Act of God occurred that caused a hardship that did not allow the client to comply: e.g. Fire, flood, hurricane, tornado, etc. (needs to also impair the client’s ability to maintain other aspects of their life: e.g. personal finances, ability to work)
Documentation includes: evidence of the disaster, insurance claims, description of property/records lost, etc.
Loss or theft of records that were outside of the client’s control, e.g. papers destroyed by employee, etc.
Documentation includes: police reports, employee dismissal documentation, etc.
- The client was a victim of a crime, e.g. embezzlement
Documentation includes: police reports, insurance claims, etc.
The IRS makes an error and the client relies on the information provided, e.g. they inform the client (and there is proof of the advice- preferably in writing) that an item is non-taxable and it is taxable.
Documentation includes: IRS person that the advice was received (including badge ID #), written advice received by the IRS
The IRS will review all the facts and circumstances in considering abatement of penalties. This includes:
• The taxpayer’s reason for the delinquency or error,
• The taxpayer’s previous history of compliance,
• The length of time between the taxpayer’s reason cited for noncompliance and the taxpayer's subsequent compliance, and
• Whether the circumstances were beyond the taxpayer’s control, e.g. reasonable cause
Proving “reasonable cause"however is not always enough.
• The accuracy-related penalty (e.g. negligence): The taxpayer must also prove that he acted in good faith.
• The failure to file and failure to pay penalties: The taxpayer must also show that the failure was not due to willful neglect
So when asking if the penalties can be abated, you need to ask yourself this first. Do I have reasonable cause!