The Internal Revenue Service (IRS) still is playing catch up from the chaos that ensued over the last several years with last minute law changes, pandemic relief rollouts and lack of staff.
While response times from the agency have improved, taxpayers still are waiting long periods of time to receive replies to paper filed documents including tax returns and response notices.
Last month, Tax Practice New reported that some notices now can be responded to electronically. If you missed the article, you can check it out HERE. While this is intended to help speed up the processing time on some notice types, it does not necessarily help preparers to draft a response that will be accepted.
Key components of an abatement request especially are necessary to help improve the likelihood of a request being granted once processed. Because taxpayers are waiting so long for processing, getting these letters right the first time is critical for saving time, money and stress.
Specifically to penalty abatement, the letter needs to include reasonable cause. Preparers should start with all the basics in their replies:
- Taxpayer name and identification number (SSN or EIN)
- Taxpayer address
- Taxpayer DOB if for an individual
- Re-state the notice number in the letter
- Include a copy of the original notice in the letter
If any supporting documentation is needed, such as proof of mailing or proof of timely filing, ensure you have read the notice carefully and are only responding with relevant documents but also not missing an IRS request for anything specific.
Now the tricky part, establishing reasonable cause. The IRS provides some more obvious reasons for reasonable cause for why a return is filed late and may need to seek penalty abatement. Those include death or serious medical conditions of the taxpayer or immediate family, a natural disaster or an error made by an IRS employee.
The only other reasonable cause would be if the taxpayer could show they made every effort to file and pay timely but accidentally mailed items to the wrong address or failed to include proper postage.
After that, any abatement request gets a little tricky. For first time abatement requests it’s always recommended that your request letter include explicit language that the taxpayer has never filed or paid late in the past. The IRS almost never grants an abatement to a repeat offender.
Whatever your reasonable cause scenario is, don’t be vague or misleading. I have had clients that have paid prior accountants to prepare returns and the preparer not only did not get to their prep, but never filed an extension.
It would seem the taxpayer should receive relief in this scenario but the IRS is very clear that reliance on a preparer doesn’t fit the reasonable cause claim. Unfortunately, neither does financial hardship, so be sure to skip over these in your abatement request.
Also pay close attention to dates on all notices from the IRS. Failing to request an abatement within the statute of limitations for the return will most likely result in a denial of your request.
What not to do is actually pay the penalty before requesting an abatement. You should follow the due process of asking the IRS to remove any penalties before advising clients to make payments.
In any and all cases, it is important with any abatement request to be clear, use facts, state them in chronological order and cite any applicable laws as well as how they apply to your facts. These pieces will help reduce the likelihood that your request for abatement will be denied.