IRS Penalty Abatement: Tips on Writing a Proper Penalty Abatement Letter
The IRS Has Assessed You with Penalties: What are Your Options Now?
In contrast to popular opinion, the IRS has some discretion in its assessment of penalties, but this discretion has limitations and procedures. In general, the IRS can grant a penalty abatement if it falls into one of four categories: 1) reasonable cause; 2) statutory exceptions; 3) administrative waiver; or 4) correction of service error.
While it is important to know that the other options exist, this article will focus on reasonable cause and how to increase your chances of success through a thorough, yet clear and concise IRS Penalty Abatement Letter attached to Form 843.
What is Reasonable Cause?
In general to meet a reasonable cause waiver, the standard requires that you have exercised “ordinary business judgment and care” in your tax obligations but still failed to comply (Internal Revenue Manual §126.96.36.199.2). For example, you should consider whether the reasons for non-compliance were outside of your control and your compliance history against the applicable standards. In particular, the facts and circumstances should show that you have made a good faith effort to comply but were unable to do so.
How to Establish Reasonable Cause and Get Your Penalties Waived
The normal procedure for filing a request for an IRS penalty abatement on the basis of reasonable cause is Form 843, but this simply might not be enough. You need to put yourself into the shoes of the IRS Agent that is going to review your file. How many taxpayers have claimed before you that their facts and circumstances merit reasonable cause relief? How many taxpayers have no ground to make this claim, but still attempt it to reduce their penalties?
To give yourself and others in Detroit the best chance of succeeding, you should use an IRS Penalty Abatement Letter attached to Form 843. Think of it as a road map to “yes” for the IRS agent. Your goal is to make it as easy as possible for the reviewing agent to grant your request by having a thorough, yet clear and concise explanation with references to the Internal Revenue Manual (“IRM”).
It might sound harsh, but keep in mind the IRS agent does not have any particular interest in you or your claim, and probably could care less whether you get stuck with the penalties or not. His or her main concern is to close your file the fastest and easiest way possible, regardless if that means accepting or rejecting your claim. All the agent wants to do is make a decision and write it up in a way that his manager will sign off on. As you can imagine, most cases are fall within the gray area, and the agent can probably support whatever decision he or she decides to make: as long as his write-up states the facts and law in a way that supports the decision, the manager will sign the report and move on.
When looking at the situation from the IRS’s point of view, it becomes very clear that in order to ensure the best chance at success in any given case, you need to make the path to “yes” the quickest and easiest way for the agent to close your file and move on to the next one. To do this, your penalty abatement letter needs to clearly state the facts of your case, cite the relevant law, then apply the law to the facts, coming to the conclusion that reasonable cause relief is warranted. If you do this properly, you will have essentially done the IRS agent’s job for him. All he or she will need to do is copy-and-paste sections from your letter onto an official report, and they will be left with a write-up their manager will sign, while doing a minimal amount of work.
How Your Penalty Abatement Letter Should be Formatted
Your IRS penalty abatement letter should be broken up into four main sections:
Statement of Facts: In a brief and concise manner, write a story that explains the facts and circumstances that underscore the reason you are requesting a reasonable cause waiver.
Statement of Law: Citations to the relevant IRM code sections here.
Analysis: This section should be the majority of the document and should clearly illustrate the reasoning that each fact and circumstance falls within the scope of the relevant IRM code sections detailed above. There should not be any new information, but rather a combination of the information from the previous two sections.
Conclusion: The letter should directly and specifically request for the penalties to be waived.
If you happen to be an attorney, this should look familiar to you. This is essentially how every lawyer in America was taught to write a legal memorandum during their very first year of law school. While CPAs are generally very good accounting and tax preparation, these types of memorandum are not their area of expertise. To get the best results, you should go to someone who has the relevant tax knowledge coupled with the ability to write a compelling legal argument. For that, you need a tax lawyer.
Another Possibility: First-Time Abatement Rule
Depending on the taxpayer’s history of compliance, it might be possible to request an administrative waiver known as a first-time abatement. This IRS penalty waiver is generally reserved for taxpayers with an isolated incident of non-compliance combined with an otherwise clean history, particularly within the last three years.
First-Time Abatement requests are extraordinarily simple, and should not require any assistance from a tax professional to complete. All you need to do is fill out form 843, write “first-time abatement requested” in the explanation section, and mail it to the appropriate address.
An important point: if there are multiple years of delinquencies and penalties, the first-time abatement will ONLY apply for the first year and not the additional years. For these cases, you should request reasonable cause relief for all the penalties involved, and use the first-time abate rule as a fallback plan to get a portion of the penalties waived should the reasonable cause argument fail.
If you feel confident, and want to try and tackle this on your own, download IRS Form 843 and get it filled out. Before getting started on your penalty abatement letter, have a look at the IRS Penalty Handbook: Introduction and Penalty Relief.
If you would rather not chance it, and prefer to have a professional take care of this for you, contact us to speak with one of our tax lawyers about the facts of your case.
[author] [author_image timthumb=’off’]https://www.ayarlaw.com/wp-content/uploads/2013/02/venar-about-sm.jpg[/author_image] [author_info]
Tax lawyer Venar R. Ayar, founder of Ayar Law Group, holds ten years of experience as an accounting specialist and tax lawyer. He earned his Juris Doctor at the University of San Diego School of Law, receiving a Master of Laws in Taxation—the highest degree available in tax. His specialty is in resolving all types of federal and state tax problems. Representing clients before the IRS, Ayar’s practice and experience has proved him as an honest and dedicated leader in the realm of tax lawyers. Throughout his career, Ayar has helped many taxpayers from Detroit and others parts of Michigan, as well as across the world to submit thorough, clear, and concise IRS Penalty Abatement Letters to maximize their chances of success. Click here to contact tax lawyer Venar Ayar. [/author_info] [/author]