Skip to content

On-Demand: Penalty Abatement

Nov 17, 2020

This webinar covered the various penalties applied by the IRS, and how practitioners can seek to have them removed.


Daniel Gibson:I just want to introduce myself for many. My name is Dan Gibson. I'm a partner in the private businesses services group in Metropark. I've been in public accounting for about 37 years with either Eisner or Amper Politziner & Mattia or EisnerAmper for about 33 years and it's been quite a ride for me. Great firm to work with, as most of you know.                                      

Daniel Gibson:One shameless plug here, next month, on December the 10th at 1:15, we'll be doing another webinar entitled Bankruptcy and Taxes. I'll be doing that with Jay Lindenberg, who is a director in our insolvency group. So if you know anybody, or you're interested in those topics, it should be a good program, about an hour long. Please feel free to go onto EisnerAmper's website and sign up on the events section.

One warning with the program in general, I know it was probably mentioned in the program somewhere, but this is not meant to be formal tax advice. But if you do have any questions in the future on any of these topics I'm going over, feel free. My contact information there, my email address, feel free at any time to reach out for me.

For today's program, we're going to discuss a number of things. The program is pretty packed. As I was putting the PowerPoint together, at some point, as most of you have done presentations, it starts getting a little bit too much. So I may not be able to hit all the areas, but the areas that we will definitely be looking at in detail will be the first four items, the overview of penalties, the common penalties. Obviously the objective here is, you're trying to mitigate the penalties. So let's figure out what penalties that we have to focus on the most, and let's learn a little bit about them.

Then we have the two track system to mitigate or get rid of these penalties. One is the first time abatement program. The other is the, once you cannot do the first time abatement, and we're going to go through that, you need to go through a reasonable cause analysis before you can assist the taxpayers in reducing or getting rid of penalties.

Dealing with exams and accuracy penalties, I'm going to skim over that when we get to that, more than likely. But once I get to that, there are certain points that I do want to make sure that I hit. I've got you guys for the next hour or so, and I'm going to try to make the most of it for you.

First of all, just a shout-out, I consider these guys, those of you that have watched my programs in the past, these guys I consider these to be in the hall of fame when it comes to tax resolution matters. Tremendous people, including our current commissioner, who was actually a line practitioner himself, not just some guy sitting in an ivory tower now and being given the IRS commissioner position. He's got a lot of writings out there, a lot of programs that he does and still does to this day. So again, this is a list of what I consider to be the hall of famers in the tax resolution area.

We have a couple of hall of famers that work for us in the tax resolution area, as well. Our group here at EisnerAmper, the tax controversy group, is co-leaded by Walter Pagano and Miri Foster. Both these people have worked for the IRS. They know how to operate and they're great leaders for the group that we have here.

Let's just go over the categories of penalties that are out there. The most common ones are the four that I have here. But actually, the top three that I have here, these are the ones that most of us as practitioners in public accounting are dealing with, are the estimated tax, the failure to file, the failure to pay, and as most of you may know, the failure to deposit is really something that is more prevalent for a business than individuals. Whereas the top three are, though they all pertain to businesses as well, we see them probably more, particularly in my area of practice, which is flow-through entity, so I'm seeing more of these at the owners' levels, the individuals' levels.

Why do we have these penalties? Well, for some people, who ask that question, and the simple answer is, is that the IRS needs to control these things. The penalties have just exploded in numbers over the years. Back in 1950, it was like 14 penalties. I think they're well over 100 these days, so they've really proliferated. But the penalties there are to make sure that people comply, that they know that there's a punishment in the event that there is a non-compliance. The public has to have that feeling that tax enforcement's being applied fairly and consistently, and people just have to know that if they go over the line as far as penalties, and I'm talking about in a very negligent way, and that's the way we have to consider penalties. We'll go through some of these reasons.

If someone, for whatever reason, if it's something out their control, it's a whole different story. But if it's a, "This is the year I just didn't feel like filing my tax returns," or, "I didn't really feel like I had to." And you make a mistake and you find out, "I should have paid in taxes and I didn't and I didn't file," well, you're going to be in quite a bundle at that point. That's why there's penalties there that you have to deal with.

Just to go through, to show you the magnitude of this, on this particular slide, I have, these are the number of cases that are out there. You'll see that there are 32 million plus cases of penalties throughout the year. This year was 2019, where this data is being showed. As you can see, the three items that we're going to be talking about, delinquency, which is late filing, estimated tax and failure to file, that makes up well over 30 million cases right there, in and of itself. It's a big part of the practice that most people that are dealing with tax controversy are dealing with those three penalties.

Here is the magnitude in dollars, as you can see. That's $14 billion as in bravo, billion dollars. As you can see again, the top three, as far as dollars, are delinquency in filing, estimated taxes and failure to file, make up 90% or more of that stuff.

One of the other interesting things I saw on this chart, and we're not going to go through this in any detail at all, but if you look at accuracy and fraud, you see that those are pretty high numbers in the average. The reason why is, the accuracy is normally associated with exams. There's an audit going on, and someone's missed something and it's been deemed as being negligent. It's a 20% penalty. Fraud can be as high as 75%. So that's why that averages. Averages for those two amounts are pretty high.

As you can see, we go back to the number of cases, we've got 32 million cases. Three million of those cases are settled in total. So you're talking 10% of cases that are out there with penalties, only three of them are actually being abated. The other 90%, people are having to pony up the penalties for this.

Again, just keep in mind, these are three penalties that, for those of us that are in the public accounting space, we live day-in and day-out with them, with these penalties, particularly if we're dealing with non-filers. These can add up pretty easily. I'll be showing these in a little bit more detail in the next couple of pages, here.

Right, very good. Let's go on to our first penalty here, which is the estimated tax penalty that we have. This is a penalty for failure to pay in enough taxes in a timely manner through the initial filing, which for most individuals, if not all, is April 15th. Normally, this penalty is calculated on a Form 2210. It's actually calculated much like interest would be. It can be somewhat confusing when you're going through with clients and showing them how it's calculated, because it's normally calculated based on a current interest rate, which is the short-term federal rate plus 3%. I have a note here at the bottom, and I'll probably emphasize this a couple of times, this really sometimes gets confused with the failure to pay. I see a lot of returns being prepared where the preparer forgets that fact that we're maybe in it for an extended period and that the estimated tax penalty which is being charged only counts up and through April 15th. You have to just remember that there's what I call a passing of the baton when it comes to late payments.

You have an estimated tax payment, which means that you weren't paying taxes timely through April 15th, but after April 15th, or as of April 15th, I should say, that penalty stops accruing, and the failure to pay then starts accruing at that point. I always call it the passing of the baton. In many of the software that we have as practitioners, you have to purposely go in and get that calculated. A lot of times, the estimated tax calculation will be done, because the system knows that it stops on April 15th. If you don't put the date that the return's going to be filed, normally the software cannot calculate the late filing fees or I'm sorry, the late payment fees. So you have to put in actually the filing date for that and force that to calculate for you.

So we have the failure to file penalty. The failure to file, as it reads, it's the failure to file as of the required due date, including the extensions. It's a 5% penalty for each unpaid tax. If you extrapolate that out for what it would be on an annual basis for interest, that's a lot of money. That's what I call a big ouch. That amount's reduced to 4.5% if you are subject to the failure to pay penalty, which is a 0.5% penalty. And then this 5% penalty is calculated up for five months, and it's a penalty that's charged on the balance that's due on the return.

The one thing, again, that some people miss is that the federal, for federal purposes, if you file a good extension, again, assuming you're going to file that before the extended due date, even if the taxpayer is underpaid and subject to the failure to pay, which is a much lesser tax penalty, you can avoid the failure to file penalty, that 5 to 4.5% penalty that we showed up above. So you want to keep that in mind and make sure that, it's very important that you get a valid extension now, for at least federal purposes.

But as a lot of folks say in our office, particularly some of our senior partners in our firm, with everything that you deal with, you always have to ask the question, "Watch the states." The states can be different. New Jersey is one. New Jersey will require that when you file your extension that, for the most part, 80% of the tax that's owed by paid by April 15th. If not, if you file an extended return, the extension will be automatically considered invalid and then for New Jersey purposes, you'll get hit with a non-payment. You could be hit with a failure to pay, as well as a failure to file penalty. So just watch the states, as I emphasize down here.

Failure to pay, this is the charge on tax balances that are not paid by the original due date. This is back to what I've talked about before. This is the penalty that's, where you're passing the baton from the estimated tax payment to the failure to pay payment. Again, it takes over from where that estimated tax payment penalty leaves off. It's a 0.5% charge on unpaid taxes. You can lower it to 2.5%, if you're on an installment agreement and it accrues each month, up until a maximum of 25%. Note that the extensions for filing do not help avoid a failure to pay penalty, or extend the time to pay.

This is just a note on the common or the combined of failure to file and failure to pay. In the case where you have both and you max out on both, it could be as high as 47.5%, and that's because of the lowering of the failure to file for the five months, the 4.5%. However, again, it's almost 50% and it packs quite a wallop to someone's wallet, especially the failure to file. If you don't have this in your mind already, you want to make sure that no matter what, and there's always excuses out there, I see them in a lot of cases where there's some unsurety, maybe people don't have information, maybe people are going through a divorce, you could continue on and on and on, people find excuses for why they shouldn't be filing tax returns. It's really not a very good idea at all. I always pretty much push anybody, even if we can get estimated numbers in there. Because you can always go back and amend later. Just keep that in mind as far as a takeaway, a lesson to all this.

If you can't pay all the taxes, that's fine. Approach the IRS in a really more controlled atmosphere and get a payment plan, whether it's an installment agreement, maybe you're in a position where your financial position is that you should be in a currently not collectible status, or maybe you can do an offer-in-compromise. But you can always figure out how to get yourself into a payment plan and do it in an orderly manner, as opposed to waiting for the IRS to track you down. Because trust me, 99.9% of the time, the IRS is going to catch you and it's going to hurt.

Again, I can't emphasize enough making sure that when you go through your returns, you know when these things start to accrue, your estimated tax penalty that's accruing throughout the year if you're not paying estimates or you're not withholding enough and then you go to file your return. Even if you file it on the original due date, which is April 15th for most of us, you want to make sure you know that that's one penalty, then you have the failure to file and delinquency penalties which follow thereafter.

We're going to go through how we handle those, but just keep in mind, particularly those that are preparing returns, that you have. I see in a lot of cases people will miss that and here were are in, it could be August, September, and we have a very large amount that's due that was maybe unanticipated. And we have a penalty that should be charged or at least considered charged to the taxpayer. Maybe what we do is, we file a return without including the charges for, say a failure to file penalty, or a failure to pay penalty, but we at least have to got be able to have a discussion with our client, letting them know, "Hey, listen. There's a good chance you're probably going to get a notice. Afterwards, we'll deal with it." And that one chance maybe the IRS will miss it, which they probably won't, at least you got to know what to anticipate.

Okay, very good. Very good. The next area, again, this is one I know we don't deal with as much. It's probably more people who deal in the payroll services, the ADPs of the world or even practitioners that specialize in this area. But this is another common penalty that we see out there. As you can see in the chart of penalties here, the penalties can add up pretty quickly. One to five days late, 2%; six to 15, 5%; 15 or more days, 10%. If a notice is sent out and it's still unpaid, you're getting hit with 15% max. If you don't file with the electronic filing, that's another 10% that could be added onto that. Just be mindful, too, in all these penalties, not just the failure to deposit, there's interest accruing on this stuff. Interest gets added on there. Obviously, if you can abate some of these penalties, the interest will reduce proportionally to the penalty being reduced. But the interest is statutory. It normally can never be reduced. As much as you may want it to be, it won't be reduced.

Just keep in mind, particularly in the failure to deposit area, those that aren't depositing monies, that good portion of these funds are trust funds. These are monies that business employers are collecting on behalf of their employees, such as withholding Social Security, things of that nature, that are then being remunerated to the IRS. If they're not, these are trust funds that are not protected by the veil of corporation or an LLC. They're funds that the IRS, once they identify who the responsible people are in an organization, could go after them. And they go after them forward. Some of these guys almost think it's like robbing a bank. They make them as equivalent to robbing a bank and some of the revenue officers go after them. Just be mindful, too, that these trust funds cannot be, they can't be canceled in bankruptcy, as well. They will stick through a bankruptcy, if you decide to declare bankruptcy, so any trust monies. That includes sales tax, by the way, when you're talking about the state side, as well as withholdings for states, as well.

Let's just talk about the first time abatement. It's what we call the get out of jail free card. It applies to three penalties, the failure to file, the failure to pay and the failure to deposit. Which again, the failure to deposit is more business and payroll-related. The failure to file and pay is more the individuals that we see out there, that at least I deal with. These are not available for that estimated tax penalty that we talked about. It's not available for the accuracy penalty that we talked a little bit about, that 20% during an audit. It's not available for estate and gift tax returns. It's not available for that 75% civil fraud penalty either.

But again, there's a program here to get yourself out of a penalty and there's two paths to go to. One is that you've never previously filed a return before, and an example that I give is somebody who started a new business, has employees, but forgets to file the initial 941s. If there's nothing to go look back on, because this is your first return, you normally can get a first time abatement on that.

The other, which is more common, is that to look to see that there weren't any delinquency penalties, meaning there was no late filing or no late payment penalties or deposits being made late, have not been assessed against you in the prior three years. We'll look at this in a little bit more detail. But there's a note here, too, that I have at the bottom, which the first time abatement is not available for anyone failing to use the electronic filing system that the IRS has. They'll hit you with a penalty on that. Unfortunately, the first time abatement will not work on that.

Here are the requirements for the first time abatements. For one, it only applies to years from 2001 and after. The taxpayer has to be in filing compliance, meaning all returns have to be filed. This is essential. This is something that has to be done in any event. If you're calling the IRS up at any point asking them for relief from something, whether it be an installment agreement, offer-and-compromise, getting penalties abated, you always have to have your filing compliance in order. The taxpayer has to be in payment compliance, same thing. These are the two musts that you have before you even call the IRS. You've got to get your clients in filing compliance and payment and compliance. By payment and compliance, I mean either the tax has to be paid or there has to be an arrangement to pay, like an installment agreement, something like that. Currently not collectible status will not work.

The other thing which is very important is that you have to have a "clean history" for the preceding three years. That means no prior penalties in those preceding three years, except for estimated tax penalties. You can have those, but you can't have any late payments penalties or any late filing penalties in those previous three years. I'm talking about even the minimum stuff. If you have like a dollar, that's not a clean history, and you're going to get dinged for that. If you have any prior years where you've completed a reasonable cause, and we'll talk about that later, penalty that has been abated, that's considered to be clean.

Even though you had a penalty and you got a reasonable cause penalty abatement, that cleans that year up. Paying the prior year penalties does not clean up the year. It's a tainted year, so even if you've paid for it. And it only applies to one year. It doesn't apply to the block years or quarters. It's just one year and usually the IRS will pick the earliest years, because obviously the later years are going to be tainted. But if you have three or four years in a row where a taxpayer hasn't filed a return, but they were clean prior to that block of years, the years before that are going to be clean to that earliest years, more than likely the penalty's going to be forgiven for that.

Now, what I would suggest, that if you ever have any of these cases that, and again, it's probably the thing you want to do with any tax resolution area that you get into or working with a client, always get transcripts. Because transcripts tell the story. Taxpayers will tell you the story. They don't always understand what they're talking about, which is understandable. They're not tax experts. But always get the transcripts. That will tell you the story as to what's happened in the current year and the previous three years in question. Again, I'd make a note down here, just be cognizant of the fact that the interest is not abatable. It can be reduced, but can only be reduced because the penalty is being reduced that has been imposed by the IRS.

And anybody looking at the transcripts, I didn't write this, I didn't have this in the notes here, but there is some codes here that you could look for in the transcripts when you're reviewing them. The transcript code for failure to file is 166, for failure to pay it's 276, and for failure to deposit there are two codes actually, 180 and 186. So if you're looking through those transcripts and looking for codes, that's how you would find those.

Yeah, I'm seeing a question here. Would the FTD penalty abatement be applied to the entire year, or just one quarter? Unfortunately, Linda, it's going to be one quarter, just one quarter. I think earlier in the game, they were able to knock out more. But I think the IRS ended up catching up with the tax community at some point and put a stop to that, and just started saying that usually it was that earliest quarter that you could get the first time abatement in.

The same thing goes for the normal incomes taxes. I know I've tried it a couple of times and have never gotten anywhere with it, is try to say, "Okay, I've got a taxpayer here. He or she did the wrong thing for three or four years." It's a block. It's not like, "Can I get the whole block forgiven?" I get nowhere with it. It takes 30 seconds, and they blow me away on that. Just keep that in mind. It's for one period, and most likely, if it's a block of quarters or years it's more than likely going to be the earliest of that block.

Okay, very good, again. Okay, so when you do the first time abatement, you can actually just call up. It's probably easier just to call up the IRS. Sometimes, quite frankly, even though I told you can get transcripts to look, sometimes you really don't even need to. But you probably want to, just to make sure. But you could just call up the IRS. Usually, they'll talk to you on the phone about the stuff. The assistor will look at the transcripts that they have, and they'll tell you either they qualify or they don't. One of the reasons why they tell you to call is because if you get an assistor who doesn't know what they're doing, a lot of times what they recommend, little tip here, hang up the phone and call back and try somebody else. Maybe you'll have better luck. Particularly if you know, if you know you're in the right and the person has a clean three-year history, just say, "Let's try it again."

I have some numbers listed here, the first set of numbers applies to taxpayers and the second set of numbers apply to tax professionals. If you get shot down for even the first time penalty, the reasonable cause penalty mitigation that we go through, always consider going to appeals. Obviously, you've got to make a cost benefit calculation before you do that. But if you can get a case into appeals, sometimes it scares people to think they got to go to appeals. But it's really a good place to go. Sometimes I've heard IRS agents refer to appeals as Santa Claus. Because a lot of times you'll have appeals officers, they're more experienced, more educated. You can talk through the issues with them as opposed to dealing with the, with all due respect, the lower staff at the IRS.

When you call, you have to make sure you have a power of attorney and a power of attorney for all the years, including the one that you have the issue with and the three years that you're looking back to. You got to make sure that you do that. If 2005, say, was your year in question, you would want to have 2002 through 2005 as a minimum on your POA. The 8821, great form for gathering information, recommend people, particularly if they have people that are not enrolled to practice before the IRS, 8821's a great form to use for those folks to gather information for the folks that have the ability to get the power of attorneys. But it's not a form that you can use to negotiate and discuss outcomes with IRS personnel. You need that form 2848, power of attorney.

Here's a case study, just to drive the point home. We got John and Mary filed a 2007 individual return late. They're requesting, you can request IRS account transcripts for years, the year in question, 2017 plus the prior three years. The review requirements you want to go through is look back at the three years previous, 2016, '15 and '14. Review for any penalties. Estimated payments are okay. Those are exceptions. And you want to make sure that, again, your filing's up to date, you got all your prior years filed and you're working in a current year, let's say, you have a valid extension. So you make sure if you have any amounts that are due that those are paid, or that you have some sort of a payment arrangement, like an installment agreement in place. Again, a good program to use here, good option to use, first thing you should be thinking about whenever you run into a client that has some penalties, it's a quick, easy way, if it is a first time situation, to clear up the client's account.

Okay, so if you go now into reasonable cause, now reasonable cause is a, it's a high bar. I have to tell you, I have to warn people. I've listened to others speak about penalty abatements. A lot of times, folks will just skim over this. They don't even want to deal with it, because it's such a high bar. People just don't understand the fact that you really have to have a good case to do this. There's a couple tips here, but there's really no secret sauce to all this. There are things that you want to make sure you include, and we're going to go through those, in your petition. You've got to put together a formal petition for this. You need to have, hopefully have some good compliance history to deal with. You need proof. You need evidence. You can't just have a bunch of happy talk in a letter. I've seen letters for reasonable cause arguments that went a paragraph. I can tell you, I don't even have to read it. If it's a paragraph, a couple sentences, it's just not going to work.

So we have this list here of things under reasonable cause. The first one, the ordinary business care and prudence, that's really got to be an element for all your cases. That's demonstrating that good faith, that you weren't negligent, that there had to be something that caused you, that was out of your control, that caused you not to be able to pay or file on time. That's, it's foundational. You got to have that. Then the rest of the things that we have covered here are reasons for your reasonable cause. We'll go through those in a little bit of detail now.

Again, this is foundational, the exercising of ordinary business care and prudence. Again, you have to establish that you weren't negligent, that you were acting prudently, but for whatever reason, you were not able to perform the ability to pay on time or to file on time. You've got to demonstrate by actions as to why individuals could have otherwise met the obligations but couldn't because of unforeseen circumstances out there that the taxpayer exercised, a sufficient degree of care, when they were going through this. You want to consider things. Like I'm saying, what's the reason? What's the compliance history? What's the time?

The length of time, if there's any tip at all that I can give you is you have to make sure you establish a distinct start and end of the cause. If there has been an illness in the family. I had a client where we had a shareholder dispute with a small law firm, and we were able to establish with court proceedings when this all started and when did it all end. Quite frankly, the taxpayer took advantage of it and there was a non-filing for four years, but we could at least carve out the shareholders' dispute that disrupted this particular taxpayer's frame of mind, and it was a two-year span in there, so we were able to do that. The IRS, they abated it in a heartbeat. I sat down with an appeals officer, we got it immediately taken off the thing. I think a lot of it had to do with the fact that we were able to demonstrate that we had a start in the beginning.

You got to be able to establish the circumstances that created this occurrence from being out of the control of the taxpayer. So you're looking at those factors. You got to have proof, evidence that you want to put in there. Again, a timeline, you got to establish that. You want to be able to show the taxpayer, this is not a recurring thing with this taxpayer. It was a non-recurring thing. We can identify the event. We can identify when it started. We can identify when it ended, and we can demonstrate by evidence, whether it be court filings, medical filings, whatever, newspaper articles, that we can support what's happened here.

The first reasonable cause is death and serious illness. It's got to be normally of the taxpayer or the immediate family member of the taxpayers. Timing is important. If someone passed away 10 years ago in the family and someone 10 years later has not paid their taxes on time, you're not connecting the timing there properly, and it really isn't a reasonable period of time to be able to demonstrate why the person did not comply with either filing or paying.

Have other things happened, particularly in the failure to pay area? Were there are other obligations that were impaired, or did the taxpayer continue to pay their mortgage, their rent, their utilities, without much issues there, and was the taxes the only things that were left behind? Listen, the taxes are probably the easiest to avoid, but they're the ones where you get hammered the most. You've got to remember that as you're going through and putting these cases together. Again, having supporting documentation is extremely important.

Cause number two is fire, casualty. You've got to be able to, again, establish some timing in these things, that they were actually critical to disrupting the ability of the taxpayer to file or pay on time and document that.

Number three, the inability to obtain records. You got to go back and explain, why were we missing records, why they weren't used, why we can't estimate the information? It's not just as easy to say you had a fire, you lost your records, particularly if it's been a while ago. You've got to be able to justify why returns and payments were not made on time.

Mistake. If reasonable cause in and of itself was a high bar, this is probably the highest bar, mistakes. Very difficult. I mean, you can establish it. You can establish that the taxpayer just completely missed it, completely blew it. But in most cases, it's not going to go very far.

Number five, if you've relied on advice or reliance on tax preparers or tax consultants, what are the credentials of the tax preparers or consultants? What was the issue? Was it too technical? Was it too complicated? Would it be something that would be a difficult thing to do? Again, it's just establishing, it's a hard bar, a high bar, I think, on something like this. Because if it was a technical or complicated issue, you would have thought you'd have gotten some credible tax preparer or consultant advice at that point.

Written or verbal evidence. If you can show that the IRS, even through some sort of, maybe a notice or maybe even a letter directly to you, maybe even an IRS publication, I've seen arguments with that. If you've got verbal advice, that's why it's important if you're ever speaking with an IRS agent on the phone on a particular matter, make sure you're writing down dates, times, names, badge numbers, and what matters were discussed with the IRS. Because they're supposed to be documenting that at the same time. If you have that documented, we cross reference those records to determine whether or not you actually were speaking with an agent at that point.

Ignorance of the law. Again, it's one of those things where it's kind of difficult to work that out. But you can. You can look at education levels of the taxpayer, going back on the compliance history. is this a recurring or non-recurring thing? Has there been a major change in law? Is there a complicated issue? This goes to the accuracy penalty reasonable cause litigation. But I know on a number of occasions throughout my career, we've argued, we've been aggressive on, say debt bases for S corporations. We've ended up having to acquiesce to the agent doing the audit, and then they go to charge us some 20% accuracy penalty. As soon as I do that, I start pulling out the 20 to 25 cases that, depending on the circuits throughout the country, are going all different ways, and being able to argue with an agent that, there's no way we should be getting hit with an accuracy penalty, because of the unclear litigation at that time.

Number eight, undue financial hardship. You've got to be able to show that. You more than likely are going to have to cough up a Form 433, showing your financial status with the IRS. It's the IRS's financial statement, basically, and demonstrate to them the fact that by paying, this was not just an inconvenience, like you couldn't go on vacation because you had to pay your taxes. This has got to be something in dire straits that you're on the edge of having to live under a bridge. That's undue financial hardship. So you've got to be able to demonstrate that, as well.

Thank you everybody for hanging in there to this point. We'll just round out the reasonable cause discussion. The list above that we went through, it illustrates a lot of points. It's not close to being exhaustive. There's still probably other things that are out there. The first time abatement, we did talk about the fact that you could do that on the phone, and most suggest that you do it on the phone. The reasonable cause, only because it's much more involved and you're collecting evidence and all this stuff, it probably, unless the amount is small and you think it's like a no-brainer and you can discuss it with someone on there. And they do have dollar thresholds. If you call up the IRS and it's over a certain dollar threshold, they will tell you that it has to be in writing. They won't tell us what that dollar threshold is. But there is one that they have.

When you do the write-up, I would suggest, and I think it's probably almost mandatory, because you're giving the IRS a statement, a writing that you've written up, and you want to be able to sign it under penalties of perjury. It just makes it, takes it from a mere statement to a sworn testimony. There's the wording that you normally would use that you would sign under for that. Again, I always advocate, whenever it makes sense cost benefit-wise, if you've gotten a rejection of a reasonable cause petition, always take it to appeals. Appeals has a little bit more liberties. They can look at more of the, they call it the hazards of litigation.

If you're in a collection due process hearing meeting, your petition is rejected, it can be appealed to Tax Court. Tax Court won't decide on it, but they'll make a judgment on it called an abuse of discretionary and push it back, if need be. If they think the, if your collection due process hearing, including your request for abatement of penalties, has not been reviewed properly by the settlement officer there.

Okay, so look over this. More stuff about the reasonable cause. In your abatement petition, make sure you're specifying circumstances, those things that are out of the control of the taxpayer that resulted in the non-compliance, even though they were acting in good faith. Specify how the circumstances affected your compliance. Provide support for timelines so that you can establish starts and ends of those circumstances. Provide medical records, property damage reports, newspaper articles, all that stuff. If you didn't meet the first time abatement requirement and you're working on this year, but you have a pretty decent history, probably worth mentioning it. Make sure anything you send to the IRS, this goes without saying, you always keep copies of it, and make sure you have proof of mailing when you send it in.

If you feel like you're getting the runaround, this is probably with anything, but particularly in the cases where you're abating penalties, if you don't feel like the IRS is addressing your issue properly and you're getting the runaround, again, the IRS has a group called the Taxpayer Advocates Office that can help you out. Most of those folks are pretty helpful. They're pretty diligent. They do follow up. I find they're pretty good at following up on issues and making sure that things are moving and things are being addressed.

Two tips. I normally wouldn't advise paying the penalty if you get into a collection due process hearing. They normally won't allow it at that point. So I would usually hold back on paying the penalty. I would expect when you send in the reasonable cause petition, it's probably going to take at least 90 days in your initial processing. If you've got to go to appeals or go to a collection due process, you're looking now at probably going out about a year, unfortunately, particularly in today's age, where the IRS are still going through stuff that was mailed to them during the shutdown.

So the reasonable cause can be used in these particular penalties: the accuracy penalty, the 20%; the civil fraud, 75%; failure to file; failure to pay, even with erroneous claims on information reporting; and tax preparer penalties, as well.

That, as far as penalties, first time abatement and reasonable cause. I just want to flip through the last part here, which is just mitigating penalties on this. A lot of this is just, how do you approach it, an exam with an auditor? You want to make sure such things as you're representing your client. You're an advocate for your client. But you're trying to be as responsive and as timely as you can. You're not giving them more than they want. But whatever they want, if it's credible, if it's stuff that they should be getting, that you're getting it them, you're getting it to them in a timely manner, you're working with them.

Again, that's not to say that you're going to be pushed around, but you want to make sure you're working with that auditor, building a good rapport with them, and being able to discuss things with them, particularly if they hit you with one of these accuracy penalties. I talked about it before. If you've got good reason to reduce that, I would definitely argue reducing that, if not getting rid of it totally. Some auditors think it's an automatic. It's not an automatic. It's supposed to be for egregious cases. And that accuracy penalty, the 20%, which is pretty painful for any understatement of taxes that you would have, again, it's supposed to be for egregious cases and the IRS is not supposed to be taking advantage of that.

These last two slides are about substantial authority and reasonable basis and adequate disclosure, on the second page. But if you have what you consider to be adequate disclosure, I mean substantial authority, never be afraid to take a position on that. If you've got some good authority behind you, whether it be a court decision, tax treaty, internal revenue code, always feel that if you're on good standing, always feel like you can take that position. There are a lot of times in cases where you really, you're almost in an in-between area, where you may not think you have enough, but the law isn't clear, I would always, again advocating, taking a position that's obviously favorable to the taxpayers. But you may feel like maybe you're crossing the line on that. It may be going against an unclear tax regulation.

Again, this is my opinion. It's not the opinion of EisnerAmper, but my opinion would be, don't ever be afraid to use the 8275 forms. The 8275-R is for those positions that are contrary to rules and regulations as you understand them. But if you've got rules and regulations out and there and so you're interpreting them a little bit differently and you want to take a hard position on that, by all means. But make sure you're disclosing them on an 8275. The 8275-R, I should say, because the 8275 is a different form. It is a disclosure form, but I tend to use that a lot to try to avoid audits. I will tell you that a lot of times I use that, I get a lot of pushback both from fellow partners and managers that I deal with that we shouldn't use those, because they're going to trigger an audit. The 8275 will normally not trigger an audit. Contrary to that, I think it actually it helps you avoid audits, because you can then explain things.

An example, and I'll go real quickly, because I know we're getting to the end here, real quickly, as some of you know on say a corporate or a partnership return, normally the balance sheets and the Schedule L are normally the gap balance sheets. If you have a big change in gap disclosures, such as the new leasing standards that are out there, all of a sudden, the year that that's instituted by the audit people or the financial people, your balance sheet compared to the prior year is all out of whack. The IRS isn't going to know that. They're not going to be able to figure that out.

I tell you this only because I've been through it from early adopters, I've learned my lesson and we've made disclosures. Whenever I see something that looks unusual in the return, it could actually be in a big N-1, too, that I've explained. I've never had the IRS push back and say, "Okay, give us the explanation for that," because I've already given it to them, an 8275. But it is, again, it's just for disclosure purposes and remember the 8275-R is for when you are going against a rule or regulation, and that could trigger an audit. It more likely will, because you're going against law or rulings by the IRS.

That's it. I'm going to go through the questions. I saw a number of them here, which is great. I will go through those over the next couple of days, and I will definitely get back to those that sent me questions. If you have any other questions, again, my email is on the PowerPoint. Feel free to shoot me an email. I'll be more than happy to address the issues for you. All right? So I'll hand it back to Lexi.

Transcribed by

What's on Your Mind?

a man in a suit and tie

Daniel Gibson

Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.

Start a conversation with Daniel

Receive the latest business insights, analysis, and perspectives from EisnerAmper professionals.