The IRS will impose delinquency penalties for failure to:
However, in some circumstances, a taxpayer is able to raise defenses to avoid penalties. If the taxpayer who had reasonable cause for the delinquency is allowed to make a first time abatement, or is protected by a statutory defense, the tax payer will not be liable for a penalty attributed to the delinquency.
- file a timely return;
- pay tax reported on a return; or
pay an assessed tax required to be, but not shown, on a return.
- The only relief from a delinquency payment is from reasonable care.
The taxpayer has the burden of proof to prove both reasonable cause and lack of willful neglect
- Willful neglect was defined by the US Supreme Court in United States v. Boyle as "meaning a conscious, intentional failure or reckless indifference."
Regulations state that "if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause."
Ordinary business care and prudence will be determined by all facts and circumstances. Lavish or extravagant living expenses or investment in speculative illiquid investment indicate absence of reasonable business care and prudence.
The following are examples of reasonable cause for delinquent filing:
- A return mailed in time but returned for insufficient postage;
- A return filed timely but in the wrong district, or directly with the Regional Commissioner or Commissioner of Internal Revenue;
- Erroneous information from a Service official;
- Death or serious illness of the taxpayer or someone in his immediate family;
- Unavoidable absence of the taxpayer;
- Taxpayer is an affected person eligible for disaster relief;
- Destruction of business or business records by fire or other casualty;
- A request for proper blanks or returns not timely furnished by the Service;
- An effort to obtain assistance or information necessary to complete the return by a personal appearance at an IRS office that was unsuccessful because the taxpayer, through no fault of his own, was unable to see a Service representative; and
- Ignorance of the law is also considered cause by the IRS if other factors support this contention, such as the taxpayer being a first-time filer.
- The IRS uses the Reasonable Cause Assistant (RCA) in evaluating abatement of certain penalties for reasonable cause. RCA is a decision-support interactive software tool used in making a reasonable determination to be used after the IRS employees have conducted normal case research
First Time Abatement
- Can be used for failure-to-file, failure-to-pay, and failure-to-deposit penalties.
- First time waiver is not statutorily mandated, but an administrative waiver.
To qualify, a taxpayer must:
Be otherwise compliant;
- A taxpayer must have filed, or filed a valid extension for, all currently required returns and not have an outstanding request, and paid or arranged to have paid any tax due.
- A taxpayer is deemed compliant if a penalty was imposed but subsequently reversed in full.
- Have not been previously required to file the return; and
Have had no penalties imposed for the prior three years.
- The client cannot have had penalties of a "significant" amount assessed in the prior three years on the same tax return for which the client is requesting abatement
Requesting a First Time Abatement
- A taxpayer can request a First Time Abatement through telephone (866-860-4259), through e-service (tinyurl.com/a7ao7u5), or in writing.
- There is an unpublished ceiling that the IRS will abate by phone or e-service.
- When requesting by writing, the taxpayer should include other penalty relief arguments. If the taxpayer has a reasonable-cause argument for penalty abatement, it should be used first. Relief from reasonable cause will not bar future attempts of a first time abatement.
- The IRS uses RCA software, which can make mistakes. If the taxpayer should qualify, the determination can be challenged, and the IRS employee or manager can override the program.
Statutory Provision. Examples include:
Penalty Abatement attributable to advice from IRS is required only if:
- the advice was written and the taxpayer reasonably relied on it;
- the writing was in response to a specific written request of the taxpayer; and
- the taxpayer provided accurate and adequate information to the Service. §6404(f)(2)
- Section 7508 exception for taxpayers in armed services serving in a combat zone
Under Boyle, a brightline rule was established that prohibits penalty abatement from delinquency when the delinquency was caused by the actions of an agent, even if it reasonable for the principle to rely on the agent.
- This brightline rule does not always apply if delinquency is caused by conduct of corporate officers on behalf of a corporation. The Third Circuit has held that "when the officers of a corporation commit criminal acts against the corporation, they do so in the absence of apparent authority," and therefore "the corporation is not automatically vicariously responsible for the penalties." The corporation would still have the burden of proof to show reasonable cause and an absence of willful neglect.
- The brightline rule has been extended by courts to failure-to-file.
- Advice of Counsel. The reliance on the act of an agent, which does not show reasonable cause, is distinguished from reliance on the advice of a tax adviser.