Nonprofit Tax Help

David McRee, CPA

IRS Penalty Abatement

IRS Penalty Abatement is an area that many tax practitioners are not familiar with. But helping a client get a penalty waived is one of the best services a tax practitioner can do for a client. There is nothing more intimidating to a taxpayer than to receive a penalty notice from the IRS. The taxpayer usually turns to his or her tax practitioner or perhaps to an attorney for help.

Once a taxpayer has received the first penalty notice, the first step is to determine whether the penalty is actually owed. Often the IRS makes mistakes and a quick letter (sent certified mail with return receipt) to the correspondence address on the penalty notice will straighten things out. For instance, if the IRS claims that a taxpayer did not file a return on time, but the taxpayer knows the return was indeed filed on time and can prove it, the penalty is not owed. In that case, sending proof of filing to the IRS is enough to have the penalty removed. In the case of any confusion of the amount of taxes paid to the IRS, a copy of a cancelled check will show that a payment was made and received by the IRS.

A more difficult situation is one where the taxpayer filed a return late, or made an error on the return that resulted in additional taxes being owed. Of course, any additional tax liability must be paid. There's no getting around that. But any penalties and interest assessed for the late filing or because of the error can generally be waived when "reasonable cause" exists.

Writing a successful IRS penalty abatement request letter is not difficult, but it must be done correctly the first time. If your request is denied you cannot ask for reconsideration of the request based on the same excuse.

If you are a tax practitioner and a client comes to you after having written a penalty abatement request that was denied, you must interview the client and read the abatement request letter carefully to look for any reasons that the taxpayer may not have included in the letter. You can submit a new letter to the IRS based on the existence of any additional reasons you uncover.

IRS penalty abatement is not a "gift" from the IRS to a taxpayer. It is provided for in the tax law. Most penalties assessed by the IRS have what is known as a "reasonable cause" waiver or abatement provision. For example, penalties for failure to file under Section 6651 are imposed "unless it is shown that such failure is due to reasonable cause and not due to willful neglect."

Success hinges on convincing the IRS that "reasonable cause" exists, and not "willful neglect." To make a convincing argument requires writing ability and a familiarity with the reasonable cause provisions.

If you are trying to have Form 990 late-filing penalties removed, or if you are re-applying for tax-exempt status after revocation and want retroactive reinstatement, I've created some materials that will help you. You will write a much more effective letter to the IRS after reading and applying my 5-Step-System for writing a reasonable cause letter to the IRS for Form 990 late-filing penalty abatement.