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Penalty AbatementBasics & Techniques
Easy-to-Use Tax Resolution & Practice Management Software
Try it risk-free at www.canopytax.com
Sponsored by:
With Tanya Baber, EA, PA, CTRS – Tax Edge, Inc.
& Ted Ferrin – Director at Canopy
} Penalty Overview ◦ IRM Part 20 – Penalty and Interest� Chapter 1 – Penalty Handbook
} Types of Relief and Techniques◦ RCA Introduction◦ FTA (First Time Abatement) Program◦ Reasonable Cause considerations
} Number of penalty provisions increasing◦ 1955 – there were 14 provisions◦ Now there are more than 100◦ Continues to grow
} Designed to encourage compliance◦ But may cause liability to increase substantially
} Penalties range across every type of tax◦ Most Common Penalties:◦ Estimated Tax Penalty◦ Collection Related◦ Accuracy Related
} Estimated Tax Penalty
◦ Treated more like interest
◦ Rate of this is same as current interest rate
◦ Underpayment of tax rate (3% in 2015)
} FTF (Failure to File)
◦ Failure to file required return by due date (including ext)
◦ 5% of unpaid tax
◦ Accrues 5% for each month (or partial month)� Up to five months� At that point reaches the maximum of 25%
} FTP (Failure to Pay)
◦ If full amount of tax balance is not paid by due date◦ .5% of the unpaid tax◦ Accrues .5% each month (or partial month)◦ Continues accruing until it reaches 25% max
◦ Remember: An extension of time to file does NOT allow an extension of time to pay!
} IF BOTH the FTF and FTP apply
◦ Penalty cannot exceed 47.5% of the unpaid tax
◦ However, it is nearly 50% of their unpaid tax assessed
◦ If they are not in compliance with filing and paying◦ And adding interest to this – can end up being substantial
} Failure to Deposit (FTD)} If IRS does not receive required deposit (payment) on time◦ In correct amount◦ Paid in the correct manner◦ Penalty can be assessed
} Unpaid balance◦ 1-5 days late – 2%◦ 6-15 days late – 5%◦ More than 15 days late – 10%◦ If still unpaid 10 days after notice is given: 15% max
} If required to be by EFT – another 10% could apply
} Trust Fund Recovery Penalty (TFRP)} If business does not pay trust fund portion◦ Employment Taxes withheld◦ Can be assessed against any of the individuals responsible◦ For collecting, accounting for, or paying these trust fund taxes
} Penalty 100% of the trust fund portion◦ Assessed on individuals personally (Civil Tax Penalty)◦ Does not cause Double-Payment◦ Instead forces individuals to pay personally for
what they neglected to pay for business
} Commonly imposed as result of examination} Audit or notice◦ Underreporting income
} If substantially understated on tax return◦ 20% of understatement can be assessed◦ Substantial understatement =
� >10% of tax required to be shown on return� Or $5,000, whichever is greater.◦ ALSO if considered negligent
� Additional negligence penalty +20% of understated tax
} IRM 20.1.1.3.6
} Artificial Intelligence
◦ ‘Decision support interactive software program’◦ RCA determines if penalty relief will be granted◦ Possible for an agent to override if necessary◦ Often they may not know about this
} They are to perform other case research first◦ Apply missing deposits/payments, adjust tax, research
missing extension, etc.◦ FTF, FTP, FTD ◦ All others possible too, but if by oral/written still run
through RCA Software
} Many references in IRM to the RCA} Sometimes success = persistence◦ (doesn’t always produce the same result)
} IRM: 20.1.1.3.6.1} FTA available for three types penalties◦ FTF (Failure to File)◦ FTP (Failure to Pay)◦ FTD (Failure to Deposit)
} More specifically◦ Files timely – but bal due – NO Payment◦ Files late – payment (Full or partial)◦ Files late – NO payment◦ Fails to file (SFR prepared)◦ Audited – additional tax assessed
} Designed as a ‘one time’ option◦ May want to pursue others first
} Requirements:◦ Taxpayer is in compliance� Filed all required returns
◦ Owes and in Installment Agreement◦ Or if no balance outstanding� Made payments against balances due in last 2 yrs
◦ Three years prior to penalty are clean� No FTF or FTP assessed
} Obtain account transcript◦ Taxpayers can access own transcript, or others too◦ Anyone enrolled in IRS e-Services� Can pull transcripts using just 8821◦ Circular 230 practitioners (EA, CPA, Attorney)� Can pull with 8821 or 2848
◦ Dates to pull – for best FTA � Recommend 1990-present
◦ Note: Even though taxpayers can pull own transcript – can only go back 10 years. May not give them benefit if last 10 years don’t qualify – but there could be a great one going 25 years back…
} Practitioner – How to obtain transcript◦ Call IRS – request fax or mailed copy � PPL Practitioners only – 866-860-4259� Or e-Help (Practitioners only) 866-255-0654◦ Use e-Services to pull transcripts� Store transcripts in e-Services mailbox
� View, print, or download to import into Excel� Can perform searches in Excel this way for codes
◦ Use commercial software tool to download� Will also analyze them to produce a report� One advantage – easy to see ALL FTA Opportunities
} Practitioner – How to analyze transcript◦ Basically look for penalty codes� FTF – Code 166� FTP – Code 276
◦ Look for this in each year for the taxpayer� There may be many code 276 that occur in each year� Add all the code 276 together for accumulated FTP
} Practitioner – How to analyze transcript◦ To complicate, can be partial removal � Actual return filed to replace SFR (reduces tax, reduces
penalty)� Amended return – reduces tax due (reduces penalties)� Remember – Partial removal is NOT full removal� Only happens because base amount of tax is reduced
◦ How do you tell if this happened?� Code 161 – Reduced/Removed FTF� Code 271 – Reduced / Removed FTP� Code 197 – Reduced / Removed Interest
� Keep in mind Interest is statutory – only recalculation of tax can produce reduction/removal of Interest
} Practitioner – Be sure you have POA ◦ Selected year you want to request FTA◦ AND 3 years prior to that year too
} Call/Write to the IRS (or help the taxpayer)
} To call IRS◦ PPS (866-860-4259)◦ General line 800-TAX-1040◦ OR: Newly released Penalty Assistance Line� 855-223-4017 ext 225
} Ask for First Time Abatement◦ For SPECIFIC tax year◦ Identify it so the agent won’t go ‘fishing’ for it
} Will use RCA software
} Should receive answer immediately◦ If approved, will go through a script with you◦ Will receive a letter (3503C)◦ Based on good history of timely filing / paying◦ Bonus: May also reduce the interest if
base penalty amount reduced
} Basically our “Good Excuse”◦ IRM 20.1.1.3.2
} Can request by phone but there are dollar thresholds ◦ If request exceeds them – can still send written
request
} Will use RCA software
} Many types of Reasonable Cause outlined in IRM (Best to reference when possible)
} Ordinary Business Care and Prudence} Death, Serious Illness or unavoidable absence} Fire, casualty, or natural disaster} Unable to obtain records} Taxpayer subject to a mistake that was made} Relied on erroneous advice◦ Also if written or oral advice from the IRS
} Taxpayer was ignorant of the law
} IRM 20.1.1.3.2.2◦ Making provisions to meet obligations when
reasonably foreseeable events occur.◦ Facts & Circumstances – establish exercised a
‘degree of care that a reasonably prudent person would’ but were unable to comply with the law◦ Consider:� Taxpayer’s Reason� Compliance History� Length of Time� Circumstances beyond taxpayer’s control
} IRM 20.1.1.3.2.2.1◦ For Taxpayer or immediate family only� Example – Spouse, sibling, parents, grandparents, children
◦ Issue must be addressed in a reasonable time after death or illness◦ Show it caused other obligations to also be impaired� Not just the taxes
◦ Need written proof of the illness or death◦ Examples: terminal illness, surgery, substance or
physical abuse, depression, disability, and emotional or psychological distress
} IRM 20.1.1.3.2.2.2◦ Major disasters include hurricane, tornado, earthquake,
flood, riot, casualty, or other ‘emergency’ or disturbance.
◦ What steps were taken to comply?◦ Did they comply as soon as it was possible to?◦ Also – consider if creates other reasonable causes� Example: a fire may cause ‘unable to obtain records’� If hospitalized due to accident ‘death, serious illness or
unavoidable absence’� Or a declared natural disaster – IRS issues special
instructions making relief available specifically for the event.
} IRM 20.1.1.3.2.2.3◦ Was ordinary business care & prudence exercised?
� Why were the records unavailable?� Why were these records needed to comply?� When and how did they become aware they didn’t have the
necessary records?� What other means were explored to secure the information?� Why didn’t they just estimate the information?� And did they comply as soon as the missing information
was obtained?
} IRM 20.1.1.3.2.2.4
◦ Generally, this does NOT keep with the ‘ordinary business care and prudence’ standard and doesn’t support reasonable cause – However-◦ Facts and Circumstances may illustrate they did comply
� When/how did they become aware of the mistake?� How did they attempt to correct?� Relationship between taxpayer and person relied on
� If mistake was not their own and they delegated the duty� Did they take timely steps to correct mistake after it was
discovered?
} IRM 20.1.1.3.2.2.5
◦ Relates to issues too technical/complicated for layperson.
◦ Did they hire preparer/consultant – what is their level of understanding & knowledge (Tax Advisor-IRM 20.1.1.3.3.4.3)� Even if they hire someone, still responsible for reporting
income to person hired� Specific relief from accuracy-related pen IRC 6662
◦ Was it due to a change in the law?◦ Were they unable to have access to their own records?◦ What is taxpayer’s own education level?
} IRC 6404(f) and Treas. Reg. 301.6404-3} Written – IRM 20.1.1.3.3.4.1 Oral – 20.1.1.3.3.4.2
◦ IRS required to abate penalty attributed to erroneous written advice provided by IRS◦ This has been extended to include oral advice if appropriate
◦ However, if they do not meet the criteria, may still qualify if they show ‘ordinary business care & prudence’� Was it reasonable to rely on advice?� Is there a clear connection – situation – advice – penalty?� Prior history of tax compliance?� Any supporting documentation?� If oral – documentation? ID, date, notes, method obtained?
} IRM 20.1.1.3.2.2.6
◦ What is their educational level?◦ Have they ever been subject to the tax before or
penalized?◦ Were there any recent tax law changes?◦ What is the level of complexity of the issue in question?◦ Did the taxpayer show a reasonable good faith effort to
comply ?
} IRM 20.1.1.3.2.2.7
◦ Did an oversight by them or another party cause the noncompliance?◦ Generally this does NOT keep with ‘ordinary business
care and prudence’� Relying on another person to perform a required act
generally not sufficient to establish reasonable cause◦ Is taxpayer’s responsibility to file timely return and
make timely deposits/payments. This responsibility cannot be delegated.◦ Therefore, may not be good to rely on this as sole
method to establish reasonable cause
◦ May support extension of time to pay◦ Must be more than an inconvenience to taxpayer� Extension of time: Form 1127 – Application of Extension of
time for payment of tax due to undue hardship� More than an inconvenience – Treas. Reg. 1.6161-1(b)
◦ Show they would sustain substantial financial loss if required to pay tax on due date◦ Only affects failure to pay (not failure to file)◦ Financial records required to prove◦ Review ‘discretionary expenditures’◦ Were there unanticipated events or a bankruptcy?
◦ Contact the IRS by phone or written request◦ Use software to help with determination of eligibility for
penalty abatement
� Use form letters to craft written request� Use script to assist in calling agent
Software – Canopy TaxIndustry Resources – CPA Training Academy
Questions?Ted Ferrin – [email protected] Baber- [email protected]
Tanya R Baber, EA, PA, CTRSServices offered:
If you would like to schedule a time to have a one-on-one consultation or request assistance with a case, contact TaxEdge at 855-726-EDGE
Hours: 8:30 AM - 5:30 PM MST • Email: [email protected]
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