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IRS Penalty Abatements and Reasonable Cause

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IRS Penalty Abatements

As noted previously, the purpose of (assessing) a penalty is to encourage voluntary compliance. “Voluntary compliance exists when taxpayers conform to the law without compulsion or threat” (IRS.gov, “20.1.1.2.1 Encouraging Voluntary Compliance,” 8/14/2013). The taxpayer supports the tenets of the Internal Revenue Code in achieving voluntary compliance when he or she makes a good faith effort to meet all tax obligations (“Encouraging Voluntary Compliance”).

Key Takeaways

  • As noted previously, the purpose of (assessing) a penalty is to encourage voluntary compliance. “Voluntary compliance exists when taxpayers conform to the law without compulsion or threat” (IRS.gov, “20.1.1.2.1 Encouraging Voluntary Compliance,” 8/14/2013).
  • Within this context, the taxpayer is deemed compliant when he or she responds to written materials outlining the tax rules and completes all forms relevant to their tax liability.
  • When a taxpayer provides an explanation to support his or her request for relief, the IRS waives and/or abates the applicable penalty.

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How IRS Interest is Calculated

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You are required to file a return if you have earned income in the previous year. You are also required to pay all tax by the due date to avoid IRS interest and penalty charges. The official due date to file and pay taxes is April 15. This is the “deadline for most people to file their individual income tax return and pay any tax owed” (IRS.gov, “Topic 653 – IRS Notices and Bills, Penalties and Interest Charges,” 7/26/2013). All U.S. tax returns are checked for mathematical accuracy. In the event that you owe money to the IRS, you will be sent a bill. With this in mind, familiarize yourself with the different types of penalties and IRS interest charged to your tax balance as well as the procedures and methods used to calculate interest and penalties.

Key Takeaways

  • You are required to file a return if you have earned income in the previous year. You are also required to pay all tax by the due date to avoid IRS interest and penalty charges. The official due date to file and pay taxes is April 15.
  • For example, there is an IRS interest charge on the unpaid tax. Unpaid tax is determined by the balance due from the date of the return to the date of payment (“Topic 653”).
  • It is important to note that the one-half of one percent rate will increase to one percent when the tax is unpaid for 10 days; and this is the time maximum for after the IRS issues a notice of intent to levy.

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More on IRS Interest Abatements

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According to section 20.27.1 Interest Abatement and Suspension Overview, reasonable cause can never serve as the basis for an IRS interest abatement (IRS.gov, 8/14/2013). With this in mind, the interest on a tax liability will accrue from the return due date until the taxpayer pays the tax obligation in full. Exceptions to the law may allow the authorization of an abatement, or suspension of interest. Exceptions may also consider certain periods relative to computing interest. When exceptions are overlooked, taxpayers may exercise the option for filing Form 843, Claim for Refund and Request for Abatement, or submitting written, signed correspondence requesting consideration.

Key Takeaways

  • According to section 20.27.1 Interest Abatement and Suspension Overview, reasonable cause can never serve as the basis for an IRS interest abatement (IRS.gov, 8/14/2013).
  • With this in mind, to request an abatement of interest charges, the taxpayer must “file an interest abatement claim with the campus where they last filed a tax return” (“Interest Abatement and Suspension Overview”).
  • The IRS may suspend interest if it is determined that it failed to provide the taxpayer with adequate notice of liability as well as failed to provide information concerning the basis for the liability (IRS.gov, “0.2.7.

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First Time Penalty Abatement Program

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Key Takeaways

  • The First Time Penalty Abatement Program relief is a one-time consideration that is applied to a first-time penalty charge.
  • [1] IRS.gov, “Part 20.
  • [5] Subsequent requests for penalty relief are typically received after the initial request for relief has been denied and are viewed as appeals to the previous relief denial (“Part 20”).

The First Time Penalty Abatement Program relief is a one-time consideration that is applied to a first-time penalty charge. The penalty relief is based upon the taxpayer’s compliance history.

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Why Retain a Sales Tax Attorney for your Collections Matter?

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Why I Believe You Should Retain a Sales Tax Attorney for Your Board of Equalization Collections Matter?

Although I am generally a big proponent of self-help legal solutions, I am also cognizant of the situations that require the assistance of an experienced sales tax attorney. One of the areas where I feel sales tax attorney representation is essential, not just an option, in the in areas of sales tax collection matters. Given the difficulty that I have encountered in practice when taxpayers try to handle their own Board of Equalization collection matters and the rigidity of the Board of Equalization, I would recommend hiring a sales tax attorney for the following general reasons.

Key Takeaways

  • Although I am generally a big proponent of self-help legal solutions, I am also cognizant of the situations that require the assistance of an experienced sales tax attorney.
  • There are two sides to a sales tax collections matter: the assessment phase and the collections phase.
  • On the other end of the spectrum, when it comes to collections, Board of Equalization collections officers have a reputation for being the most inflexible and the most aggressive when it comes to taking action against a past due account.

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Sales Tax Audit: An Overview

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An Overview of a Sales Tax Audit

A sales tax audit has key differences from a regular audit. First, the scope of the audit looks at a business’s gross receipts and various ways of measuring gross receipts. The businesses that are most frequently subject to sales tax audit include bars, restaurants, retail stores, manufacturers, wholesalers, services businesses that sell goods, and a variety of others.

Key Takeaways

  • A sales tax audit has key differences from a regular audit. First, the scope of the audit looks at a business’s gross receipts and various ways of measuring gross receipts.
  • Throughout their years of practice, sales tax auditors have developed ways of determining gross receipts that are innovative and industry specific.
  • The Board of Equalization sometimes feels that these methods are more telling than a standard gross receipts test.

Throughout their years of practice, sales tax auditors have developed ways of determining gross receipts that are innovative and industry specific. For example, if the business audited were a coin-operated laundromat, the Board of Equalization may measure water consumption levels for the business against the number of washing machines it has. Pour tests are common for restaurant and bars (the amount of alcohol used to make each drink) and inventory audits are common for other types of businesses.

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What Types of Matters Should You Retain IRS Attorneys For?

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Continued From Part One

3) Independent Contractor Issues

This category piggybacks off of technical tax matters, as matters that involve independent contractors can often be the most costly and the most difficult for taxpayers to resolve. For example, even IRS attorneys can be heavily tested in an independent contactor audit. When performing an independent contractor audit, the IRS and many state revenue agencies will use a multi-factor test with as many as twenty different variables. The variable (pardon the pun) nature of an independent contractor audit is something that overwhelms many practitioners, let alone an individual taxpayer. Most IRS attorneys are extremely familiar with this multi-factor test and can help you strategize in an audit. In addition, both independent contractor audits and IRS collection issues are often high dollar cases if they involve multiple attorneys and multiple years. It is best to not leave anything to chance and to retain an IRS attorney to represent you in your independent contractor matter.

Key Takeaways

  • 3) Independent Contractor Issues
  • 4) Foreign Tax Matters
  • 5) Collections Matters that Concern Going Corporations and Businesses

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What Types of Matters Should You Retain an IRS Attorney for?

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The decision to hire an IRS attorney is one that should not be taken lightly. Attorneys can be extremely cost prohibitive and complicate matters unnecessarily when they can be resolved relatively easily. In general, I am a big proponent of self-help legal solutions, especially given the variety of informational material that can be found online (including much of what I have published on the subject of taxation). However, there are certain types of matters where I believe an IRS attorney is not only a benefit, but much of the time is an absolute necessity. Here is a quick checklist of the matters that I believe that an IRS attorney should be hired for.

Key Takeaways

  • The decision to hire an IRS attorney is one that should not be taken lightly. Attorneys can be extremely cost prohibitive and complicate matters unnecessarily when they can be resolved relatively easily.
  • Let’s be entirely honest for a second. Criminal charges and criminal investigations can destroy lives and carry very serious consequences.
  • There are many parts of an IRS attorney’s job that are seemingly routine. Most collection matters are handled in roughly the same way (even though each taxpayer’s circumstances and goals are different).

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What is Reasonable Compensation?

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One of the recent hot topics with respect to the IRS audits has to do with auditing S corporations[1] (and those taxed like an S, such an LLC) for not paying their employee/owners “reasonable compensation. According to the IRS “S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee” (IRS.gov, “S Corporation Compensation and Medical Insurance Issues,” 8/31/2013).

Key Takeaways

  • The reason for the increasing prevalence of S corporation reasonable compensation audits is because a number of taxpayers were forming S corporations to avoid the self-employment tax that would be otherwise charged on their net income.
  • The IRS bases their authority to audit S corporations for reasonable compensation on multiple federal court cases.
  • Determining reasonable compensation must first be established by evaluating what the shareholder-employee did for the S corporation. To best understand the role of the shareholder-employee, the IRS examines the source of the S corporation’s gross receipts.

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How to Audit-Proof Your Tax Return (almost)

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Full disclosure here, the IRS does not reveal the exact criteria that it uses to audit a tax return. However, this closely guarded statistic is not so much of a secret anymore. Not surprisingly, the government uses statistics to analyze tax returns and to determine which taxpayers it selects for IRS audits. Shameless self-promotion alert: I have also written a pretty comprehensive list of the factors that the IRS that are known by tax attorneys as “audit red flags.” However, in this post, I want to discuss perhaps the most important factor in avoiding an IRS audit: essentially making it bulletproof from the scrutiny of the IRS.

Key Takeaways

  • Full disclosure here, the IRS does not reveal the exact criteria that it uses to audit a tax return. However, this closely guarded statistic is not so much of a secret anymore.
  • Here’s a quick recap about how IRS audits work. All tax returns are processed into a computer, where they are assigned two scores: a DIF score (assessing the potential changes on a tax return [i.e.
  • The fact of the matter is that the IRS can only conduct a certain amount of IRS audits per year, so it selects the tax returns that are most likely to yield revenue or that contain the greatest potential for error for additional review.

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Brotman Law Featured in Inc. Magazine - Fastest Growing Law Firm in California