Penalty Abatement (Removal)
IRS Penalty Abatement Criteria
The primary IRS penalty abatement reasonable cause criteria center around natural disasters, loss or destruction of vital business records, bad advice from the IRS or an accounting professional, criminal activity, medical issues, substance abuse problems, and other serious circumstances.
A couple years ago I developed a standard list of questions to ask clients to assist me in preparing their penalty abatement. This list of questions should be given some serious thought before requesting penalty abatement, as you are more likely to get what you want if your request covers one of these areas:
• Were any financial records lost or destroyed?
• Was there any transition in your business that lead to the failure to pay taxes, such as a change of ownership?
• Was there a death or serious illness that directly affected your ability to work or impacted the operation of your business?
• Were you the victim of any embezzlement of funds, theft of valuable property, or identity theft?
• Were there any alcohol or drug abuse issues that affected your business or your personal wage earning capability?
• Was there a natural disaster that impacted you or your business?
• Did you rely on the advice of a CPA or IRS employee in making tax decisions?
• Were there any circumstances that created substantial financial hardship, to the point where either yourself or your business was close to going bankrupt?
These questions cover all of the IRS reasonable cause criteria to one extent or another, so finding an answer to your personal or business situation that covers one or more of these questions is the key to a successful penalty abatement application.
Writing Your Penalty Abatement Request
You can use Form 843, Claim for Refund and Request for Abatement to apply for relief from penalties. However, as a tax practitioner, I never have, not even once. The reason is simply because the form only has room for about two sentences in order to explain WHY you are requesting the penalties to be removed. Therefore, you’re going to end up writing a lengthy letter anyway that gets attached to the Form 843. Because of this, I simply write a letter for my clients that includes all the same information as the Form 843. My typical penalty abatement letter is 3 to 5 pages long, and some are even longer.
The format of a penalty abatement letter is fairly straightforward. When requesting a penalty abatement, I suggest the following format:
1) Indicate the particular penalty types, tax periods, and penalty amounts that you are requesting to be reduced or removed.
2) Include a very brief introduction about who you are, where you live, your family size, and what you do. For a business, give a very brief description of your business, what it does, and how it does it.
3) Provide the background story to the event that caused the tax bills to go unpaid. Be sure to include very specific details, including names, dates, places, events, etc.
4) After explaining why the taxes weren’t paid, explain what actions you took to correct the situation, including an explanation regarding the length of time it took to get the tax situation addressed.
5) For business taxes, explain why other business expenses were paid when the taxes were not.
6) Explain the current state of affairs, including the current status of your personal or business finances, and also the status of meeting your current tax obligations and how you’ve addressed the back tax liabilities
7) Sign your request under penalties of perjury.
Where To Send Penalty Abatement Requests
If you have or recently had a Revenue Officer assigned to you, send your penalty abatement request to that Revenue Officer.
If you do not have a Revenue Officer: Most of your IRS notices most likely come from one particular IRS service center. Make note of the address of that IRS center, and mail your request to the attention of “Service Center Penalty Appeals Coordinator”.