Tax Lawyer's Blog

The IRS assesses penalties against taxpayers for, among other things, the following:

• late filing of a tax return;
• late payment of tax;
• the negligent preparation of a tax return;
• the substantial underpayment of tax; and
• civil fraud.

Penalties range from 5 percent per month in the case of late filing of a return to 75 percent of the underreported tax liability in the case of civil fraud.

Usually the IRS will automatically assess the penalty and force the taxpayer to make an affirmative application for penalty relief.

This tutorial is explains how to apply for that relief.

What Form Must an Application for Penalty Abatement Take?

There is no official form for IRS penalty relief.

There are rules and requirements, however, and they must be followed to the letter or the request for relief will be denied.

An Application for Penalty Abatement must contain the following information:

1. The name, address and social security or tax ID number of the applicant;
2. A list of the penalties with which the taxpayer disagrees;
3. A statement of facts giving rise to the applicants failure to comply;
4. A statement of facts in support of the taxpayer’s argument that penalties should not be assessed or should be abated;
5. A statement of the law supporting the taxpayer’s request for penalty relief; and
6. Documentary exhibits in support of all factual assertions.

Items 3,4 and 5 are the crux of the application and if not prepared thoroughly and with utmost diligence, the request for relief is likely to be denied.

Common Mistakes Taxpayers Make in Penalty Abatement Requests

In 25 plus years of representing taxpayers in penalty disputes I have seen just about every type of mistake ranging from the mailing of the application to the wrong address to the making of arguments that had already been denied by the IRS and the Courts.

The most common mistake we see made, however, is a global one: Taxpayers and many tax representatives seem to think that sending a simple letter to the IRS requesting that the penalties be abated will suffice.

The truth is, however, that the IRS receives millions of these simple penalty relief request letters every year and the great majority are summarily rejected.

If a penalty abatement request is worth making – and it almost always is worth making- it is worth making correctly.

And, because the IRS receives so many sub-par requests for relief, an application that is done with thought and thoroughness stands out in a positive way.

If You Don’t Ask, You Don’t Get

The purpose of IRS penalties is to punish the taxpayer for failing to comply and to send a message to other taxpayers that compliance will be strictly enforced.

If neither of these purposes are furthered by the imposition of a penalty, the IRS should not assess it.

Furthermore, for most types of penalties, if the taxpayer has reasonable cause for his failure to comply, the penalty should not be assessed.

For these reasons, we generally recommend that taxpayers challenge penalties assessed against them.

“Reasonable cause” is a subjective matter and the only way to definitively determine whether or not a failure to comply was willful or a result of extenuating circumstances is for the IRS to conduct a thorough investigation of all the facts and circumstances giving rise to the failure.

This investigation is triggered by a correctly filed Penalty Abatement Request.

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