When a taxpayer fails to file a timely return and/or fails to pay their taxes when due, the IRS charges the taxpayer interest and penalties. The interest and penalties are designed to encourage compliance and create fairness in the tax system. Many times the interest and penalties assessed by the IRS can increase a taxpayers IRS debt by up to fifty percent.
However, there are times when a taxpayer has acted in a reasonable and prudent manner yet, because of circumstances beyond their control, they are unable to meet their tax obligations. Under these circumstances, the IRS may “abate” the penalties assessed. This means that the IRS may reduce or eliminate the penalties.
The IRS grants the abatement of penalties when, “the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.” This is called “Reasonable Cause Relief.” Essentially, this means something beyond the control of the taxpayer has occurred that caused him or her not to file or pay his or her taxes timely. It also must be demonstrated that the taxpayer took reasonable steps to “counter” the events and were still unable to pay and or file timely.
Unfortunately, abatement through “reasonable cause relief” is very difficult to obtain. The burden rests on the taxpayer to prove that he or she exercised requisite care and prudence. In addition, it has several prerequisites.
First, the Taxpayer or their representative must make the request for abatement. Typically, this is done by the completion of IRS Form 843 along with a written petition – although verbal requests are accepted. The request is then forwarded to an IRS Appeals Officer to work the case. Working the case is similar to working on any other matter with the IRS Office of Appeals, with the usual contact being over the telephone and via facsimile.
Second, the taxpayer is encouraged to pay the tax due in full, including the penalties. Although this is not a statutory requirement, it is an administrative guideline designed to avoid confusion and increase efficiency. For example, were the entire tax and penalties due not paid in full at the time of the abatement request, additional penalties and interest would continue to accrue until the granting of the abatement request. This may lead to multiple abatement requests.
Third, the taxpayer’s situation must be closely analogous to a very short list of events that will be considered for “reasonable cause relief”. They are:
- Ignorance of the Law
- Error or Mistake was Made
- Serious Illness, Death, or Unavoidable Absence
- Unable to Obtain Records
- Incorrect Advice from a competent tax professional
- Incorrect advice directly from the IRS, written or oral
- Fire, Casualty, Natural Disaster, Other Disturbance
- Acts of God
Finally, the taxpayer must meet their burden of proof – i.e. based upon all the facts and circumstances surrounding the situation, that “the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.” The IRS looks at several factors to determine if this obligation has been met and that the taxpayer is entitled to relief. Here is a list of questions the IRS focuses in on when making a determination as to whether or not to grant the requested abatement:
- What are the events that happened?
- When did the events happen?
- Why did these events prevent the taxpayer from complying with the tax law?
- How were other affairs handled during this time?
- Does it appear the taxpayer singled out the IRS not to be paid and paid other creditors?
- What steps were taken to try to mitigate your circumstances?
- Is there a direct “timeline” correlation between what happened and the taxes being filed late or not paid?
- Is there a history of filing and or paying late?
- Were the circumstances “beyond the control of the taxpayer” truly unavoidable, and could not be anticipated?
- What documentation was provided to prove reasonable cause?
- Was the documentation from an uninterested “third party”?
If the taxpayer can prove that they have a reasonable cause for not meeting their IRS obligations, the IRS may remove or reduce the penalties.