Why the Internal Revenue manual is valuable to your clients.

• Author: Allen, Susan C.

The Internal Revenue Manual (IRM) is essentially the IRS employee handbook. It contains instructions on how to carry out all administrative and procedural matters, such as how to audit specific tax returns, collect taxes, process returns, or assess penalties. The IRM may be the most important tool provided to IRS employees as it contains vital information to help them do their jobs. Nonetheless, practitioners often wonder why it matters to them. The IRM itself is not the law, and the procedures set forth in it are not mandatory or binding on the IRS. Practitioners tend to look to the real legal authorities (e.g., the Internal Revenue Code, Treasury regulations, and court cases), not the IRM.

However, understanding how IRS personnel are instructed to perform certain procedures can be valuable to practitioners. For example, gaining insight into how the IRS will audit a specific area on a return (such as the techniques they use or the items they request) can help a CPA prepare for an audit, address IRS inquiries, or prepare tax returns. Additionally, and perhaps most importantly, certain items in the IRM are not available anywhere else. A CPA who never refers to the IRM cannot fully serve his or her clients. This item contains several key areas of the IRM that should be noted in tax practice. (The IRM can be accessed online at irs.gov/irm.)

First-Time Penalty Abatement (IRM [section] 20.1.1.3.6.1)

The IRM contains first-time abate (FTA) procedures that allow IRS employees to remove failure-to-file, failure-to-pay, and failure-to-deposit penalties from a taxpayer's account if they meet certain criteria. The policy behind this procedure is to reward taxpayers for having a clean compliance history--everyone is entitled to one mistake.

To qualify for an FTA, a taxpayer must not have been required to file a return or must have no prior penalties (except an estimated tax penalty) for the preceding three years, must have had no penalties added to or removed from its account for the past three years, must have filed (or filed a valid extension for) all required returns, and must have paid, or arranged to pay, any tax due.

An FTA can save a taxpayer thousands of dollars, and sometimes it can be obtained over the phone. IRS employees can usually pull up the taxpayer's account and quickly determine whether the taxpayer meets the criteria. The clincher is an FTA is granted only to taxpayers that request one. Thus, knowing about this penalty relief...