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Reasonable Cause: The IRS Penalty Abatement Standard

What is an abatement of penalties for reasonable cause?

What’s worse than owing taxes to the IRS?  The astronomical amount of penalties and interest that they add to the debt to make the debt even higher.  Often times, the penalties that the IRS assesses can dwarf the amount of tax that was owed in the first place.  This leads many taxpayers to get discouraged and give up on ever getting their tax debt paid off in full.  But there are mechanisms in place which can help to reduce the overall amount of tax debt, by reducing the amount of penalties that are owed to the IRS. 

The IRS will consider the abatement of penalties on a taxpayer’s account if the taxpayer can prove there was “reasonable cause” to have not filed the taxes or returns on time.  The only problem is that the IRS does not explicitly state what “reasonable cause” is, and oftentimes it is a subjective decision made by a lone IRS agent at the Penalty Abatement Unit. So, when a taxpayer is requesting an abatement due to this undefined standard of reasonable cause, where should they go for guidance?

How do I know if I have reasonable cause or not?

A lot of taxpayers may think that their unique circumstances warrant a reasonable cause abatement, but will the IRS agree with that assessment.  First off, a taxpayer should sit down with a tax professional and really evaluate what lead to the penalties and what their potential reason could be.  This could be one specific situation, or a slew of factors that culminated in the eventual accrual of tax liability and the associated penalties.   These reasons could range from anything to a clerical error, to erroneous IRS advice, or a serious illness or death in the family. 

The Internal Revenue Manual (IRM) should be the first resource for determining if there is reasonable cause for the abatement of the penalties.  There are many different factors which are listed in the IRM which would help a taxpayer provide a base for which they are going to request for the abatement. 

Drafting the Abatement Request

When drafting the actual correspondence, it is important to cite the IRM and applicable case law very specifically.  The IRS has a tool which analyzes these requests and searches for key words, so it can identify a valid abatement request.  That being said, it’s not necessary to use hashtags or just include keywords for fluff purposes but citing specific standards will allow your request to stand out from other, more generic requests.  It is important to be as specific as possible and include any supporting documentation which could help to substantiate the request. For example, if you have a heart attack and this was the time when you became delinquent, then include medical information that shows when the heart attack occurred.   Another good use of substantiating documents, is if you are claiming financial hardship as the reason behind the accruals, perhaps it would be prudent to include delinquent bills or shut-off notices in your abatement request.

What Are My Odds of Success?

This is a question that we get on a daily basis and every time we hear it, we have the same response.  It is very difficult to give a percentage or likely odds of a successful abatement for reasonable cause, as they are all fact-specific.  Often, there are fact-specific factors that can lead to one result over another.  Furthermore, it’s difficult to determine what the IRS agent who examines the request will deem as “reasonable cause”.  But I will tell you that 100% of penalty abatement requests that don’t get submitted, do not succeed.  Just like Wayne Gretzky says; “you miss 100% of the shots you don’t take”. 

While there is no way to know for sure that your request for a Penalty Abatement for Reasonable Cause will be approved, if you craft a coherent and well-fashioned request, it will greatly increase the odds of approval. 

Adam Holleran, EA, JD

Timberline Tax Group, LLC

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