Pesky IRS penalties: how to get them abated for clients.

• Author: Allen, Susan C.

The IRS can assess many types of penalties against taxpayers: late-filing penalties, late-payment penalties, estimated tax penalties, accuracy-related penalties, and the fist goes on. This item summarizes common IRS penalties that tax practitioners see on almost a daily basis, and procedural and practical ways to obtain a penalty abatement.

Failure-to-File and Failure-to-Pay Penalties (Sec. 6651)

Each year many taxpayers file a return late and/or make a payment late. The IRS sends out countless notices (using an automated process) to propose failure-to-file and failure-to-pay penalties, often referred to as late-filing and late-payment penalties--and the IRS abates many of these penalties.

First-time penalty abatement is an easy "get-out-of-jail-free card" for taxpayers who have a clean compliance history, i.e., a history of fifing and paying on time as well as no prior penalties (except an estimated tax penalty) for the past three years. And the reasonable-cause (facts and circumstances) defense can also be successful. Refer to Internal Revenue Manual (IRM) Section 20.1.1.3.2 for a fist of the IRS's criteria for evaluating the most frequently raised defenses for these penalties. Death, serious illness, fire/casualty, erroneous advice, forgetfulness, and even ignorance of the law are among the defenses discussed in the IRM. In addition, administrative waivers granted by the IRS, discussed in IRM Section 20.1.1.3.3.2, may apply to provide relief for certain taxpayers, such as disaster area victims.

Here are penalty abatement tips for failure-to-file and failure-to-pay penalties:

* If a client meets penalty abatement criteria, practitioners can attach a penalty nonassertion request to a late-filed return. This way, a practitioner could potentially avoid a notice stream altogether.

* Practitioners should cite the law and authority, including the IRM when requesting a penalty abatement. It is useful to quote the IRS's employee handbook (the IRM) because it can help IRS personnel do their job (and help taxpayers timely receive penalty relief).

* Under Sec. 6651(h), the failure-to-pay penalty is reduced when a taxpayer establishes an installment agreement. And, if a client meets penalty abatement criteria, a practitioner should request penalty abatement at the beginning of the installment agreement and again at the very end (i.e., after the debt is paid in full). If the IRS removes penalties at the beginning of the agreement, and the taxpayer...