The steps to resolve penalties depend on the penalty (late filing, late payment, return accuracy) and the type of proceeding (electronic assessment, audit or CP2000, etc.). For each of the major penalties, here are the steps to resolve and get penalty relief:
Accuracy penalties: Taxpayers follow the deficiency procedures during their audit or CP2000 notice when requesting relief (i.e. non-assertion) for accuracy and other return-related penalties. If the taxpayer misses the appeal during the audit or CP2000 notice, they can request penalty relief by audit or CP2000 reconsideration.
Estimated tax penalties: For estimated tax penalties, taxpayers request a waiver of the penalty (i.e. annualized income method, etc.) when filing their return (suing Form 2210).
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Failure to file/pay penalties: However, for assessed failure to file and failure to pay penalties, here are the steps to follow to request penalty relief:
#1: Get background information to evaluate if you qualify for penalty relief: in this step, you need to gather the information needed to evaluate if you qualify for penalty relief and which type of relief to request. Information is needed from both the IRS and the taxpayer to understand options:
IRS account information: there are 3 items to get from the IRS- compliance history (all returns filed, balances paid in a collection agreement that is in good standing), penalty history (penalties assessed and/or abated in prior years), and the specific penalties assessed that require relief. This information will be needed to evaluate whether you qualify for First Time Abatement (FTA). Also, the compliance history and status will be relevant in a reasonable cause argument.
Taxpayer information: the taxpayer needs to create a timeline of events that cause the noncompliance. The taxpayer will need to provide an explanation of how the event(s) were unforeseen and outside of their control – and how they caused the noncompliance (late filing or payment). The taxpayer will need to gather third-party evidence to support their argument. The taxpayer will also need to show how other areas of their life were affected by the unforeseen circumstances.
#2: Fix any immediate noncompliance issues: taxpayers should not proceed with abatement if they are not in compliance. That means filing all required back returns and making sure they are in good standing with any back balances owed.
#3: Determine penalty relief method: the options are usually to request FTA or reasonable cause. The taxpayer can also request automatic relief if the IRS did not identify the taxpayer as being affected by a Presidentially-declared disaster area. Most taxpayers request FTA or reasonable cause relief. Taxpayers always need to evaluate FTA First. Any request is first evaluated for FTA, even though the taxpayer requested reasonable cause. However, if the taxpayer does not qualify for FTA, they can request reasonable cause relief.
#4: Request relief: FTA can be done by phone. Contact the IRS and ask for FTA – show the IRS that you had no penalties in the three prior years and that you are currently compliant. Reasonable cause abatement should be requested via Form 843 or a penalty abatement request letter. The request should clearly state the years and forms involved, and the penalties that are requested to be abated. The request should also state the facts that show the unforeseen circumstances outside of your control that caused the noncompliance. The request should also provide specific dates and facts that show the reasonable cause, with supporting evidence to prove your argument. All requests require that the taxpayer attest that all facts presented are accurate, under penalties of perjury.
#5: Obtain abatement or appeal any adverse determination: the IRS will issue their determination. FTA requests have an immediate phone determination. Reasonable cause requests take about 2-3 months for an IRS response. The IRS determination can be a denial, partial denial, or a full allowance. Any denial can be appealed to the IRS Service Center Penalty Appeals Coordinator. The taxpayer has 60 days to appeal the adverse determination. In reality, because most penalty abatement requests are informal, the IRS will accept an appeal that is filed past the 60 days. Once the appeal is requested, the taxpayer will get an opportunity to provide their complete circumstances and argument as well as more evidence to an IRS appeals officer. If the denial is sustained, the taxpayer must pay the penalty and file a claim to re-argue the case against the IRS in court. This is not a practical remedy for most penalty situations.
#6: Confirm the penalties were abated: if the agreement reached on penalty abatement, the taxpayer should follow up to make sure the penalties were abated. Taxpayers should review their specific account transcripts to make sure the penalties were abated.
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