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IRS penalties. At some point in almost everyone’s life, it seems, we will receive greetings from the IRS which includes a penalty. The penalty could result from filing or paying your taxes late or misstating your income or deductions on your return. Penalties can range from just a few dollars to quite a substantial sum if the error is considered grossly negligent or even fraudulent.
What should you do when this watershed event occurs in your life? First of all, if the penalty is for more than just a few dollars, you should immediately call us. All too often, the IRS can simply be incorrect in their assessment. Many IRS notices are generated by computer matching of records and a simple glance at your return by a trained human eye will quickly see the innocent discrepancy.
Even if the error and the resulting penalty are legitimate, however, you still have options. The IRS will abate penalties if you can show that the error arose from reasonable cause.
What constitutes reasonable cause? That depends, of course on the situation. We can tell you that the way you request the abatement and state your case can make all the difference in whether or not it is granted. That is why it is typically in your best interest to call us for assistance. We have written many requests for penalty abatement for our clients and we generally know the difference between reasonable cause and a “flimsy excuse.”
Some of the “reasonable cause” arguments the IRS will accept are as follows:
Ignorance
Don’t laugh! Even though ignorance of the law is not generally an excuse accepted by your local peace officer, it just may be accepted by the IRS. Why is that? Because many of the intricacies of the tax code can really be quite confusing for the average taxpayer and the average IRS employee is aware of that.
If the penalty resulted from a complex tax issue and you can demonstrate that you made an honest effort to abide by what you thought was the rule, you may try throwing yourself on the mercy of the IRS. Of course, if the issue is fairly straightforward, you may possibly do yourself more damage than good by making a shallow ignorance plea which would supercede a much more reasonable excuse for the error, so use this argument wisely.
A Simple Mistake
Say what? It’s that easy? Could be. If you can show that you or a subordinate simply missed a tax deadline, but took corrective steps as soon as you discovered the error, your excuse may pass muster. Of course, this excuse will not work for individual taxpayers missing the April 15th deadline since that is such a well publicized event, but many business deadlines are not quite so well noted and honest mistakes do happen.
The IRS will consider many factors when you are taking the “mistake” route. How quickly did you discover the error, how quickly you acted after discovering the error, your past history of making deadlines, etc. They are simply looking to see that you exercised general business prudence in your actions both before and after the error was discovered.
Professional advice
Wait a sec – you want to blame us? Actually not a bad idea. Demonstrating to the IRS that you acted on the result of incorrect professional advice can be considered reasonable cause if you can adequately demonstrate the following in your appeal:
You provided complete and accurate information to the tax advisor
You did in fact rely on the advice of the tax advisor
You can provide supporting documentation of the advice provided
You had no reason to know or suspect that the advice was incorrect
Death or Serious Illness
Almost always acceptable as a reasonable cause in the case of an individual return, it is much more difficult to use death or illness for business payments or returns. Even if you can demonstrate that only one person in the business was responsible for the filing or payment, the IRS may counter that you, therefore did not exercise ordinary business care.
Casualty or Natural Disaster
Again, if you can prove that the error was caused by circumstances beyond your control (fire, flooding, theft, etc.), the IRS will generally allow it as reasonable cause. However, you may be asked to provide proof of the casualty – police or insurance records, etc.
Lack of Money To Pay
Wouldn’t it be great if this one worked? Actually, on occasion, it does. This is not an easy excuse to use, but if you can demonstrate that you are unable to pay as a result of an unexpected loss (medical bills, loss of a job, etc.), the IRS may grant you reasonable cause. You should again be prepared to back up your claims and produce bank statements, medical bills, etc. to back up your claims.
You may also have to demonstrate that you had no other means of securing the funds to make the payment when due. Simply trying to show that you had no money in the bank at the time the payment was due would typically not be considered reasonable cause. The IRS would simply counter that you knew the taxes had to be paid and should, therefore have saved the money.
Unable To Obtain Necessary Records
The IRS will grant you reasonable cause if you can prove that you were unable to obtain the necessary records needed to file a return. Bear in mind that you will be required to demonstrate that you could not have accurately estimated the information or obtained the information from another source.
You must take great caution here to show that you exercised common business prudence in maintaining or obtaining the records necessary. Copies of correspondence requesting the records may be needed to state your case.
The important factor to keep in mind when dealing with IRS penalties is simply this; the decision on whether to grant an abatement or enforce a penalty is left to the sole discretion of the IRS employees examining your case or reading your mournful letter. It is in your best interest to realize that you are not dealing with a ship of fools and your most likely success will come from an honest and forthright explanation of your case.