In a famous saying by Benjamin Franklin, “… but in this world nothing can be said to be certain, except death and taxes.” In the past 100 years, it would be very safe to add to the end of that quote, “and the Internal Revenue Service asserting penalties.”
File a return late? Penalties. Pay taxes late? Penalties. Forget to list out all your income on a tax return? Penalties. Forget to report a foreign bank account? Penalties.
The good news is that when the IRS imposes a penalty, there are a variety of procedures and arguments that can be used to remove or mitigate those penalties. If you are an individual, or a business owner, and have a clean filing history, you may qualify for an administrative “first time penalty abatement”. The IRS will not automatically apply this penalty relief – you have to ask.
If you do not qualify for automatic first-time penalty abatement, there are still options available. The IRS typically reviews penalty abatement cases by considering “reasonable cause”, and in certain circumstances also considers “good faith”. Treas. Reg. § 301.6651-1 provides that, to avoid the penalties for failure to file a return or pay taxes, a taxpayer must “make an affirmative showing of all facts alleged as a reasonable cause” for such failure. If it is determined that the delinquency “was due to a reasonable cause and not to willful neglect, the addition to the tax will not be assessed.” To avoid the penalties asserted for an accuracy related penalty under IRC 6662, Treas. Reg. § 1.6664-4 states, “No penalty may be imposed under section 6662 with respect to any portion of an underpayment upon a showing by the taxpayer that there was reasonable cause for, and the taxpayer acted in good faith with respect to, such portion.”
Treas. Reg. § 301.6651-1 further provides that reasonable cause can be shown if the taxpayer exercised ordinary business care and prudence but was nevertheless unable to pay taxes or file tax returns on time, or would have suffered an undue hardship had the taxpayer completed their return on the due date. Treas. Reg. § 1.6161-1 describes an “undue hardship” as “more than an inconvenience to the taxpayer,” stating that “[i]t must appear that substantial financial loss, for example, loss due to the sale or property at a sacrifice price, will result to the taxpayer for making payment on the due date of the amount with respect to which the extension is desired.”
Dickinson Wright attorneys have assisted clients in the abatement or compromise of millions of dollars of taxes, penalties, and interest. A specially prepared cover letter and supporting documentation with an IRS Form 843, prepared by an experienced tax professional, is the best chance at having an IRS penalty removed or reduced. And if that does not succeed, then be sure to talk with your attorney about how to deal with IRS collections. Even if the penalty remains, there are ways to arrange for the payment over time or in special circumstances to have the government write-off the amounts due through an offer-in-compromise.