Reasonable Cause Penalty Abatement
When we owe the IRS a large sum, we always hope for at least “some” Penalty Relief. However, writing the IRS to obtain Penalty Abatement has become a fine art. Gone are the days when we only had to send in a sob story to the IRS and if we told a good enough yarn, the IRS would abate the penalties. Even IF the IRS agent on the receiving end of your letter feels sympathy, this will not be enough to authorize that IRS agent to grant a penalty relief. The IRS demands that the penalty abatement reviewers establish that there is Reasonable Cause for the penalty abatement.
Let’s review two ways that we can make our Penalty Abatement applications easier for the IRS to establish Reasonable Cause, and ultimately improve our chances of getting them approved!
1) Cite the IRS Code
2) Name (and date and place) dropping is Encouraged!
CITE THE IRS CODE
Tax Relief Pros help the process along by citing IRS code sections and procedures from the Internal Revenue manual. By referencing the very law that the IRS uses, we can assist the IRS worker with the processes needed to do their job.
Some of the reasons that IRS will consider reasonable cause for late filing of tax returns or late payment of taxes are:
• Fire, casualty, natural disaster or other disturbances
• Inability to obtain records
• Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
• Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so
• Undue financial hardship
Each one of the above criteria are defined in an IRS Code Section. Quote the IRS code when approaching the IRS!
Also, be prepared to prove that the above happened.
NAME DROPPING ENCOURAGED
The more verifiable the dates, times, locations and events the better. I’ve personally read over dozens of letters prepared by CPAs and EAs that were denied penalty abatement. The overwhelming common thread that I see thru all of them is either 1) too much emotion or fluff and 2) not enough substance and proof of the criteria that the IRS needs to grant penalty relief to the Taxpayer.
I’m not claiming that I have had every single penalty abatement letter granted thru the years, but because this is my specialty, I’ve had alot of time to hone my craft. The less emotional the letter, the more “just the facts ma’am” the letter, the better the chance of successful outcomes.
For example, which of the following examples sounds more believable to you:
Letter 1: “I would like to request penalty abatement from the IRS. The reason why I couldn’t pay my taxes because I was very sick for many years and I had to go to the hospital many times, and buy medicine. I was so sick for so long that I could hardly work and I wasn’t able to hold down a job. I had to take whatever I could just to keep food on the table. Please grant me relief for these penalties.”
Letter 2: “I would like to request penalty abatement from the IRS. The reason why I couldn’t pay my taxes because on January 16th , 2009, I was admitted to St John’s Hospital for pneumonia. While I was there, I contracted a staff infection. I was released on February 1st 2009, after a 12 day hospital stay. I went back to work but was still symptomatic. I collapsed at work due to fatigue on February 6th 2009. I was admitted to Edward Smith hospital on the same day. I had a cracked rib and a kidney infection. I was released from the hospital this time on February 11th 2009. Since I had missed so much work, my company had not held my job. I began my job search but was unable to find stable employment. My health took 2 years from the original January 16th 2009 hospital stay to stabilize. My income decreased from $35K in year 2008 to $21K in year 2009, and $24K in year 2010. Enclosed are copies of hospital records showing the dates herein, as well as copies of medical records from the doctors I saw all throughout year 2008 and 2009. I am also enclosing copies of my many job pay stubs, including the temporary jobs I took. I am also enclosing copies of my bank statements for all 24 months so you can see that each month I had no extravagant purchases. Please note deposit on October 1st, 2009 in the amount of $1,000 was a gift from my mother because I had no way to pay my rent. Please note the deposit on January 15th, 2010 in the amount of $2,000 was a loan from my friend Ada Klein. I used this to stock up on food, as you will see by the purchase the next day at Costco in the amount of $464.34. I also used this to pay my $1,500 health insurance deductible for the year 2010. Please grant me relief for the year 2009 & 2010 penalties.”
Letter #1 looks quite emotional, and there is no way for the IRS to verify anything because no specific information was provided to be verified! As you can see, Letter 2 contains lots of facts. Hospital records with intake date, discharge date, diagnoses, income, loans, gifts with dates; these are the types of things that IRS can verify.
In summary, when sending a request to the IRS for penalty relief:
- Be sure to cite the Internal Revenue Code.
- Leave out generalities and emotions, and instead include SEVERAL verifiable facts that can be supported by backup documents.
If you don’t have any concrete dates, people, places or documents, then don’t bother sending the penalty abatement letter. It’s just a waste of your time!
If you are a Taxpayer, consider hiring a seasoned Tax Relief professional who has obtained many penalty abatements in the past. Also, if your professional charges you a fee before asking you specific information to substantiate the claim, that’s a red flag. Your professional may be in the habit of just trying to throw something at the wall and see if it sticks. Instead, you want to look for a professional who asks you several questions about the events surrounding the time-frame that you intend to apply for penalty relief.
These questions may be :
• What happened and when did it happen?
• What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file and/or pay your taxes timely?
• How did the facts and circumstances affect your ability to file and/or pay your taxes or perform your other day-to-day responsibilities?
• Once the facts and circumstances changed, what actions did you take to file and/or pay your taxes?
After your tax pro reviews all your answers to the questions, he should determine whether or not you fall into the IRS guidelines for establishing Reasonable Cause for penalty abatement. If your tax pro believes that he CAN establish Reasonable Cause, then he will quote you a fee for the penalty abatement letter. At that time, you can determine if the penalty amount would be greater than his fee. Also, the best of the best of Tax Pros claim that they have a 50% success rate with penalty abatement. So ask yourself, is the dollar amount of the penalties greater than my tax pros fees to apply for the abatement? If there is only a 50% chance of winning, is it still worth it to attempt a penalty abatement claim with IRS with only those odds?
If you would like to meet with us to determine if you qualify for Penalty Abatement, call our office at 602-687-9768 and schedule a consultation! We offer our initial consultation at an affordable low rate! Call today!