If you failed to file your tax return or didn’t pay your taxes on time, you will likely receive a CP501 or other IRS notice detailing the amount you owe, including penalties and interest. Most taxpayers assume the penalties are unavoidable, but you can successfully protest and even appeal some penalties.
Seeking Penalty Abatement
The IRS most commonly abates, or forgives, failure-to-file and failure-to-pay penalties when the taxpayer has a reasonable cause. Individual facts and circumstances play a role in whether the IRS accepts a taxpayer’s reasonable cause argument. Generally, the IRS will consider any reason where the taxpayer exercised “all business care and prudence” to file or pay on time but was unable to do so. Examples of reasonable cause include, but are not limited to:
- Fire, casualty, or natural disaster
- Death, serious illness, or incapacitation of the taxpayer or an immediate family member
- Inability to access records
The IRS will sometimes grant first-time abatement to taxpayers who in previous years have complied with all filing and payment requirements and not been assessed a penalty in the past three years prior to the current tax year. Administrative abatement might be available to taxpayers who were assessed a penalty because they relied on incorrect oral advice from the IRS.
Note, however, the IRS does not forgive interest for reasonable cause or first-time abatement cases. It will reduce a taxpayer’s overall interest by the portion related to any forgiven penalty.
It’s best to request penalty abatement in writing, either through a letter or by filing Form 843, Claim for Refund and Request for Abatement. The IRS will consider all documentation and evidence related to the reason for non-payment or failure-to-file, as well as look at how long it took the taxpayer to become compliant following the event.
When the IRS Rejects an Abatement Request
If the IRS rejects a request for penalty relief, the taxpayer may be able to appeal the agency’s decision. Generally, taxpayers have 30 days from the date of the IRS’s rejection letter to request an appeal.
To be eligible to file for an appeal, a taxpayer must have:
- Been assessed a failure-to-pay or failure-to-file penalty in writing
- Sent a written request to the IRS for penalty abatement
- Received a Notice of Disallowance denying penalty relief and detailing the right to appeal the IRS’s decision.
A request for an appeal hearing or conference should be in writing and sent to the address on the Notice of Disallowance, rather than mailed directly to the IRS Appeals Office. The appeal will first go to an IRS examination or collection office, which will consider the protest and attempt to resolve the issue. If this office cannot settle the issue, it will send the protest to the IRS Appeals Office.
IRS Appeals Office Process
The IRS Appeals Office is separate from other IRS operations. The office will independently review all documentation and facts, consider related tax law, and then decide whether to grant the appeal.
Taxpayers have the right to represent themselves in discussions with the Appeals Office, or be represented by an attorney, certified public accountant, or other agent authorized to practice before the IRS. While a taxpayer might feel confident in their ability to argue an appeal, an experienced tax attorney will understand the nuances and intricacies of the process and help ensure no mistakes are made.
If a taxpayer agrees with the Appeals Office’s determination, no further action is required other than to pay their tax bill if they haven’t already done so. Note, penalties and interest continue to accrue on any unpaid balance throughout the request for abatement and appeals process. In order to keep these from accruing, taxpayers can pay in advance of their awaited abatement or appeal decision.
Taxpayers who do not agree with the IRS Appeals Office’s decision can file a lawsuit with either the US District Court or US Court of Federal Claims. In most cases, penalties must be paid before filing suit.
Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer
If you are requesting tax penalty abatement or interested in filing an appeal of an IRS decision to disallow abatement, the experienced attorneys at Wiggam & Geer can help. Our lawyers can evaluate your situation, recommend a course of action, and assist you in the process. Contact Metro Atlanta’s top tax attorneys by clicking here or giving us a call at (404) 609-1300.