Penalties and Interest

What are the Common Problems that Arise with Penalties and Interest?

Penalties and interest are words that are too frequently combined when discussing an IRS tax problem. Penalties and interest are distinct and separate issues. Generally, penalties accrue when a tax is either paid late or a tax return is filed late. Interest accrues on the both the tax and penalties from the time at which they become due. The common problem with penalties and interest abatement is that taxpayers are too often directed to pursue this difficult course of action when other alternatives to an IRS resolution may lead to both a greater savings of tax along with a cessation of enforced collection action. The IRS TaxMasters Resolution System can assist with penalty and interest abatements while simultaneously assist in advancing alternative IRS resolution methods that can further lower the tax and avoid enforced collection action.

Penalty Abatement

In order to achieve penalty abatement, a taxpayer must show that they meet a reasonable cause standard. Generally, this means that the taxpayer must be the victim of crime, substance abuse, mental disease or natural disaster. In seeking a penalty abatement, it will be necessary to produce evidence of the event that led to reasonable cause. Examples of evidence for a penalty abatement include a police report, medical report or insurance report. Finally, in achieving a penalty abatement, a taxpayer must tie causation into the equation. In other words, a taxpayer must show that the reasonable cause event directly led to the taxpayers inability to either pay the tax when due or file the tax returns when due.

Examples of successful Penalty Abatements

In the first example of a successful penalty abatement, the taxpayer was a self employed and the father of 6 children. His pregnant wife and 7th child both nearly died during childbirth and as such were in the hospital for nearly six months after the birth. During this 6 month period, the taxpayer was unable to manage his business affairs because the focus of his attention was the 6 children he had at home along with his ailing wife and 7th child in the hospital. In this penalty abatement request, the taxpayer was able to tie the medical condition of his wife and 7th child (along with his responsibility to look after his 6 other children) with his inability to adequately manage and look after his business. As such, reasonable cause was met and the accrued penalties and interest on those penalties were abated.

Interest Abatement

Interest abatement is much tougher to achieve than penalty abatement. Interest abatement can only occur in a couple of circumstances. First, interest abatement can occur if it can be shown that a delay occurred in IRS resolution based upon errors made by the IRS itself. In this circumstance, a taxpayer must show that they took every reasonable effort to advance a tax dispute to conclusion but were prevented from doing so based upon errors and omissions created by the IRS. This is a very difficult standard to meet and taxpayers pursuing this type of IRS tax relief usually do not prevail. Second, interest abatement occurs if there are extreme circumstances. The typical example of an extreme circumstance is that of an American spy being caught and wallowing in a foreign prison. Under these extreme circumstances interest and penalties should be abated.

There are a variety of ways to seek penalty and interest abatements. Penalty and interest abatements can be requested orally, in a written letter or with the use of IRS forms.

If a penalty or interest abatement request is initially denied, a taxpayer has a right to appeal the denial to the Regional Board of Appeals and have the matter re-investigated

Likelihood of Success

In considering whether to seek an abatement of penalties and interest, the focus should not be on whether abatement will be approved by the IRS, but on how much abatement will occur. Most penalty and interest abatement requests are initially denied by the IRS Collection Division. As such, most resolutions for penalty and interest abatements occur at the IRS appeals level. The standard of review for settlement with the IRS appeals office is more forgiving than that of the IRS collections division where the penalty and interest abatement requests originate.

How to Make your IRS Penalty or Interest Abatement Request

There are three factors in advancing a successful penalty or interest abatement requests. First, a taxpayer must have documentation that evidences reasonable cause. Second, a taxpayer must know where their case is positioned within the IRS Administration so as to properly submit the penalty and interest abatement request. Third, the penalty and interest abatement must be crafted in a way that allows for settlement success either at the IRS collection level or appeals level.

How the IRS TaxMasters Resolution System Can Help

With the IRS TaxMasters Resolution System, all you need to do is follow the IRS TaxMasters Resolution System and speak with on of our Tax Attorney so you are able to submit an effective penalty or interest abatement request. Once the penalty abatement or interest abatement request is submitted, the matter will work its way through the IRS administrative system for approximately 2 to 4 months. During this period of time, our tax law firm (Segal, Cohen & Landis LLP) is available to guide to conclusion. We are merely a phone call away if you any questions regarding your tax matter and are available to guide you to final resolution.