Penalty Abatement & Resolution Basics
April, 2024 - United States of America
“What’s called a difficult decision is a difficult decision because either way you go, there are penalties.” — Elia Kazan (1909-2003)
One of the most common questions I hear from clients is some version of “Can you remove the penalties from my tax bill?”
While penalty abatement is available, I typically caution clients to first focus on obtaining a formal resolution to the tax debt. Although penalty abatement can be granted if you have a record of clean compliance or if you show reasonable cause, it is not always wise to request relief until you have paid the tax or established a resolution such as in the Installment Agreement. In fact, if neither has been done, the taxing authorities will rarely grant penalty abatement.
When it comes to penalties assessed by the Internal Revenue Service (IRS), the most common are failure to file, failure to pay, federal tax deposit penalty, estimated tax penalty, and the Trust Fund Recovery Penalty (TFRP). To call the TFRP a penalty is a bit of a misnomer since it is the principal tax amount that a business withheld from employees’ paychecks, and then failed to pay over to the IRS. It is a portion of the related business liability, so if a business is paying its liability through an Installment Agreement, those payments are applied to the TFRP as well. But remember that establishing a resolution for the business collection case does not automatically resolve the TFRP case against the individual(s). The individual cases must be addressed and resolved separately. A good representative can resolve both business and personal cases in a coordinated and complimentary way.
The IRS will abate or remove penalties if you can establish reasonable cause. This is generally established when the taxpayer proves that he or she exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations. A showing of reasonable cause typically requires evidence that the taxpayer acted in good faith and that the failure to comply was not due to willful neglect. Absent first-hand knowledge of what led to the tax accrual, a good starting point for a penalty abatement is asking the taxpayer to describe in his or her own words what happened. This should provide enough insight for your tax attorney to further investigate and eventually expound upon key relevant points. It’s always best to focus on the facts and timelines that overlap with the specific tax periods.
If penalties have been assessed against you or your business, you can minimize the damage by remaining current on all tax obligations moving forward, establishing a formal resolution to the back tax liabilities, and formally requesting abatement of all assessed penalties.
For questions or issues regarding tax matters including penalty abatements, or other tax issues, contact [email protected].
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