Tax Penalty Removal

We know it is punitive at best but there is a solution to it even as it is an IRS top moneymaking tool.

Under Section-6651 (a) of the Internal Revenue Code taxes go up 25% and more when filed or paid late after April 15 under Section 6651(a) of the Internal Revenue Code. It is called a “statutory penalty”. It is the penalty due to “willful neglect.” This penalty or addition to tax can be abated or removed under what is called, “reasonable cause.”

The burden of proof to show reasonable cause is upon the taxpayer on delinquent returns. Mental illness and medical problems often can constitute reasonable cause.

However, in a lot of cases the level of reasonableness required is quite high, almost to the point the taxpayer must be “incapacitated” that he or she was unable to perform the required functions to prepare a tax return during the relevant time period from the time when the return was due until the return was filed. What circumstances happened in between these two (2) dates are important and must be established.

The standard of “reasonable cause” will be more difficult to meet if the taxpayer was filing multiple delinquent tax returns. General medical problems, or simply not feeling good, stressed out, or over-worked will likely be insufficient to meet the “reasonable cause standard”. The facts and circumstances of each case must be explained convincingly in a well-written letter. Documentations supporting the facts must be submitted, such as letters from doctors, medical records, death certificates, insurance records, or a police report if the excuse was based on medical reason related to a crime.

Penalties have been removed for such diverse reasonable causes such as “adult-attention deficit disorder” (interestingly as caused by prohibited drugs ingested at socialite/celebrity parties), depression following the death of a spouse, alcoholism, and even in one instance, a divorce. Fortuitous or inevitable events could also occur as close to the date of filing the return. Explain these facts to succeed in getting penalties abated.

As I always tell my clients, “the true facts must show in good faith and not a lie.” Removing penalties must be looked at as an alternative resolution when the taxes cannot be settled through an offer-in-compromise, or a tax bankruptcy discharge. Citing analogous cases that went to court on penalty abatement will be extremely helpful. Illness of a member of your immediate family may be “reasonable cause” for late filing.

You could find these decisions in Williams v. Commissioner, 16 T.C. 893, 906 (1951) and Hayes v. Commissioner, T.C. Memo. 1967-80. As a word of caution, penalty abatement requests should not be frivolously submitted. Your tax representative must have good writing communication skills that unfortunately few accountants possess. Most of them as we know are the “number crunching” people, sitting quiet on their desk all the time.

Some penalties also may be “administrative” or “non-statutory” in nature. The Internal Revenue Service in their administration of the tax laws and procedures imposes these burdens. Their abatement, however similar, is based on IRS discretions and with somewhat lower standards. And before I forget to tell you, “statutory penalties” also earn interest like taxes but “administrative penalties” may not. Finally, if you believe your penalties can be removed/abated, tell your true story to the IRS. You will never know until you try. The truth is more often easy to defend. Call me if you need any help.

Angel Y. Dayan, EA, ABA, ATA, CPA is a Tax Problems Resolution Specialist. He is an IRS Enrolled Agent, and Certified Public Accountant in Texas. He completed a Masters in Tax Defense Representation. He is a Graduate Fellow of the National Tax Practice Institute and Member of the American Institute of CPAs. He is a Graduate of the American Academy of Tax Practice where he completed advance training in tax practice and procedures. His office is at 150 East Olive Ave., Ste.-116 Burbank, CA 91502. He meets clients daily for appointment. He could be reached at (213)-365-1040. Visit his website at www.taxwork.com

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