plus an entirely different method.
by michael rozbruch, cpa
the irs audit notice checklist
the irs has over 148 different penalty types they can hit you with. and the worst part is that the irs can also charge interest and additional penalties on the original penalty.
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penalties can be such a high percentage of the overall tax debt that it generally makes sense to consider requesting the irs remove or reduce penalties in certain situations.
irs penalties can often be reduced to zero in two ways: you can request penalty relief under the irs’s “fresh start initiative” and/or you can also request relief from penalties because of “reasonable cause.” what is “reasonable cause,” you ask? the major ones include
- economic hardship,
- death or serious illness of a loved one,
- unable to obtain records and
- bad advice from a tax preparer, to name a few.
how to get penalties removed
you can request the removal (abatement) of penalties for your clients two ways:
- “first time” penalty abatement
- reasonable cause argument
first time penalty abatement
- updated may 3, 2013 (generally applies to 1040 tax)
- one-time consideration available only for taxpayers with a “clean” compliance record
- must not have incurred “failure to file” or “failure to pay” penalties for three years preceding the year you are requesting fta on (must review roa)
- can only request one
- you can request it verbally with acs or to a revenue officer; does not have to be in writing
- if granted by acs, it is usually approved on the spot
- all returns must be filed, paid or arranged (i.a.) to pay
practice tip: request it whenever you are setting up a streamlined (under $100,000 in liability) installment agreement.
reasonable cause arguments
per the internal revenue manual (irm) section 20 there are nine main “reasonable cause” arguments to get penalties removed:
- death, serious illness, unavoidable absence
- fire, casualty, natural disaster
- unable to obtain records
- mistake was made
- erroneous advice or reliance
- written/oral advice from the irs
- ignorance of tax laws
- reasonable cause/ordinary business care and prudence
- undue economic hardship