Handout # 4
PENALTY ABATEMENT REQUEST & REASONABLE CAUSE
ISSUES in APPEALS
Procedures for Beginning Penalty Abatement Request:
- In response to an IRS Notice, you write the Penalty Abatement Request and send it to the address on the notice, following the procedures outlined for “if you disagree,” etc.
- If it has been a long while since the late filing or late payment penalties were assessed…and the taxes remain unpaid (fully or partially), you can write a Penalty Abatement Request and send it to the Penalty Abatement Coordinator at the IRS Campus dealing with the taxpayer
(see the address given on any notice of tax amount due).
PENALTY APPEAL AND “REASONABLE CAUSE”
Key Point:
When responding to a penalty assessment for a client, DO NOT make a “knee-jerk” reaction by writing an emotional letter about the taxpayer’s situation and making no connection between the facts and circumstances and the applicable law.
DO…take time to review the law relating to reasonable cause, obtain the facts and circumstances from the client, including documentation of the facts asserted and then determine if the client’s situation falls into one or more of the commonly recognized legal grounds for reasonable cause presented below.
How to Approach the Problem
In determining whether the taxpayer has established reasonable cause IRM 8.11.1.3(6)
includes the following list of questions to ask:
a. Do the taxpayer’s reasons directly relate to the penalty that was assessed?
b. Does the length of time between the event cited as a reason and the filing or
payment date cancel the effect of the event on the noncompliance?
c. Does the continued operation of a business after the event that caused the
taxpayer’s noncompliance negate the event’s effect?
d. Should the event that caused the taxpayer’s noncompliance or increased
liability have reasonably been anticipated?
e. Was the penalty the result of carelessness or did the taxpayer appear to
have made an honest mistake?
f. Has the taxpayer provided sufficient detail (dates, relationships) to determine
whether he/she exercised ordinary business care and prudence?
g. Is a non-liable individual being blamed for the taxpayer’s non-compliance?
For example, what is the nature of the relationship between the taxpayer and
this individual? Or is the individual an employee of the taxpayer or an
independent third party such as an accountant or a lawyer?
h. Has the taxpayer documented all pertinent facts, i.e., death certificate,
doctor’s statement, insurance statement for proof of fire, etc.?
i. Does the taxpayer have a history of being assessed the same penalty?
j. Does the amount of the penalty justify closer scrutiny of the case?
k. Could the taxpayer have requested an extension or filed an amended return?
Ordinary Business Care and Prudence
IRM 8.11.1.3(5) states, “Any reason for delinquency in filing, making deposits, or
payments which establish that the taxpayer exercised ordinary business care and
prudence but was unable to comply within the prescribed time, will be accepted as
reasonable cause.”
A failure to file is due to reasonable cause if the taxpayer exercised ordinary business
care and prudence and was nevertheless unable to file the return within the prescribed
time.
In determining if the taxpayer exercised ordinary business care and prudence, review
available information including the following:
(a) Taxpayer’s Reason.
The taxpayer’s reason should address the penaltyimposed. To show reasonable cause, the dates and explanations should clearlycorrespond with events on which the penalties are based. If the dates andexplanations do not correspond to the events on which the penalties are based,request additional information from the taxpayer that may clarify the explanation (SeeIRM 20.1.1.3.1.2(2)).
(b) Compliance History.
Check the preceding tax years (at least 2) for paymentpatterns and the taxpayer’s overall compliance history. The same penalty, previouslyassessed or abated, may indicate that the taxpayer is not exercising ordinarybusiness care. If this is the taxpayer’s first incident of noncompliant behavior, weighthis factor with other reasons the taxpayer gives for reasonable cause, since a firsttime failure to comply does not by itself establish reasonable cause.
(c) Length of Time.
Consider the length of time between the event cited as areason for the noncompliance and subsequent compliance. See IRM 20.1.1.3.1.2(2).
Consider: (1) when the act was required by law, (2) the period of time during whichthe taxpayer was unable to comply with the law due to circumstances beyond thetaxpayer’s control, and (3) when the taxpayer complied with the law.
(d) Circumstances Beyond the Taxpayer’s Control.
Consider whether or not thetaxpayer could have anticipated the event that caused the noncompliance.
Reasonable cause is generally established when the taxpayer exercises ordinarybusiness care and prudence but, due to circumstances beyond the taxpayer’scontrol, the taxpayer was unable to timely meet the tax obligation. The taxpayer’sobligation to meet the tax law requirements is ongoing. Ordinary business care andprudence requires that the taxpayer continue to attempt to meet the requirements,even though late.
Common Grounds Claimed as Reasonable Cause
IRM 20.1.1 contains a helpful summary of some common situations that, depending on
the surrounding facts and circumstances, may constitute reasonable cause. This
summary is based on Policy Statement P-2-7. The grounds listed include:
a) Ordinary business care and prudence (IRM 20.1.1.3.1.2)
b) Ignorance of the law (I.R.M. 20.1.1.3.1.2.1)
c) Death, serious illness or unavoidable absence (IRM 20.1.1.3.1.2.4)
d) Unable to obtain records (I.R.M. 20.1.1.3.1.2.5)
e) Undue hardship (IRM 20.1.1.3.2.3)
f) Reliance on erroneous advice from a tax professional or written advice from the
Service (IRM 20.1.1.3.2.4)
g) Fire, casualty, natural disaster or other disturbance(IRM 20.1.1.3.2.5)
h) Official disaster area (IRM 20.1.1.3.2.6)
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