Penalty Abatement

You should be prepared to answer the following questions when you discuss your case with attorney Michael Ablan:

1. What happened and when did it happen?
2. During the period of time you were non-compliant, what facts and circumstances prevented you from filing a return, paying a tax, or otherwise complying with the law?
3. How did the facts and circumstances prevent you from complying?
4. How did you handle the remainder of their affairs during this time?
5. What attempts did you make to comply?

For those penalties where reasonable cause can be considered, any reason which establishes that you exercised ordinary business care and prudence, but was unable to comply with a prescribed duty within the prescribed time, will be considered. The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that you acted in good faith or that your failure to comply with the law was not due to willful neglect. Each case must be judged individually based on the facts and circumstances at hand.

1. Ordinary financial care (“business care”) and prudence includes making provision for financial/business obligations to be met when reasonably foreseeable events occur. You may establish reasonable cause by providing facts and circumstances showing you exercised ordinary care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless was unable to comply with the law.

2. In determining if you exercised ordinary business care and prudence, here are some things to consider:

A. Your Reason(s). Your reason should address the penalty imposed. To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based.

B. Compliance History. Look at your preceding tax years for payment patterns and overall compliance history. The same penalty, previously assessed or abated, may indicate that you are not exercising ordinary care. If this is your first incident of noncompliant behavior, weigh this factor with other reasons for reasonable cause, since a first time failure to comply does not by itself establish reasonable cause.

C. Length of Time. Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance. Consider: (1) when the act was required by law, (2) the period of time during which you were unable to comply with the law due to circumstances beyond your control, and (3) when you complied with the law.

D. Circumstances Beyond Your Control. Consider whether or not you could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when you exercise ordinary business care and prudence but, due to circumstances beyond your control, you were unable to timely meet the tax obligation. Your obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence requires that you continue to attempt to meet the requirements, even though late.

1.Ignorance of the Law

a.In some instances you may not be aware of specific obligations to file and/or pay taxes. The ordinary business care and prudence standard requires that you make some reasonable efforts to determine your tax obligations. Reasonable cause may be established if you show ignorance of the law in conjunction with other facts and circumstances.

b. For example, the Michael Ablan Law Firm will ask you to address these considerations:

i.Your education and employment history,
ii. How long have you been subject to the tax,
iii. If you have been penalized before or
iv. If there were recent changes in the tax forms or law which you could not reasonably be expected to know.
v. The level of complexity of a tax or compliance issue

c. Reasonable and good faith effort to comply with the law, or
d. You were unaware of a requirement and could not reasonably be expected to know of the requirement.

1.Mistake was Made

a. Try to establish reasonable cause by claiming that a mistake was made.
b. The reason for the mistake may be a supporting factor especially if additional facts and circumstances support the determination that you exercised ordinary business care and prudence.
c. When and how you became aware of the mistake.
d. The extent to which you corrected the mistake.
e. If you took timely steps to correct the failure after it was discovered.
f. Supporting documentation.

2. Forgetfulness

a. Try to establish reasonable cause by claiming forgetfulness or an oversight or another party caused the noncompliance.
b. Relying on another person to perform a required act is generally not sufficient for establishing reasonable cause but it can be a factor especially if you are not in a position to do it yourself.
c. The IRS will argue that it is your responsibility to file a timely and accurate return and to make timely deposits or payments and this responsibility cannot be delegated.

3. Death, Serious Illness, or Unavoidable Absence

a. An individual: If there was a death, serious illness, or unavoidable absence or a death or serious illness in your immediate family (i.e. spouse, sibling, parents, grandparents, children), you may be able to abate penalties.
b. A corporation, estate, trust, etc.: If there was a death, serious illness, or other unavoidable absence of you or a member of your immediate family, and you had sole authority to execute the return, make the deposit, or pay the tax, you may be able to abate penalties.
c. If someone, other than you (or the person responsible), is authorized to meet the obligation, consider the reasons why that person did not meet the obligation when evaluating the request for relief. In the case of a business, if only one person was authorized, you need to determine whether this was in keeping with ordinary business care and prudence.
d. Information to consider when evaluating a request for penalty relief based on reasonable cause due to death, serious illness, or unavoidable absence includes, but is not limited to, the following:

i. The relationship between you and the other parties involved.
ii. The date of death.
iii. The dates, duration, and severity of illness.
iv. The dates and reasons for absence.
v. How the event prevented compliance.
vi. If other business obligations were impaired, and
vii. If tax duties were attended to promptly when the illness passed, or within a reasonable period of time after a death or absence.

4. Unable to Obtain Records

a. If you were unable to obtain records necessary to comply with a tax obligation, you may be able to establish reasonable cause if you exercised ordinary business care and prudence, but due to circumstances beyond your control you were unable to comply.
b. Why the records were needed to comply.
c. Why the records were unavailable and what steps were taken to secure the records.
d. When and how you became aware that you did not have the necessary records.
e. If other means were explored to secure needed information.
f. Why you did not estimate the information.
g. If you contacted the IRS for instructions on what to do about missing information.
h. If you promptly complied once the missing information was received; and
i. Supporting documentation such as copies of letters written and responses received in an effort to get the needed information.

5. Undue Hardship

a. An undue hardship may support the granting of an extension of time for paying a tax or deficiency. Treas. Reg. 1.6161-1(b), provides that an undue hardship must be more than an inconvenience to you. You must show that you would sustain a substantial financial loss if forced to pay a tax or deficiency on the due date.
b. Undue hardship generally does not affect a person’s ability to file and therefore would not provide a basis for penalty relief in a failure to file situation. However, each request must be considered on a case-by-case basis. Undue hardship may establish reasonable cause for failure to file on magnetic media, under Treas. Reg. 301.6724-1.
c. Undue hardship may also support relief from the addition to tax for failure to pay tax if, the explanation for the noncompliance supports such a determination. However, the mere inability to pay does not ordinarily provide the basis for granting penalty relief. Under Treas. Reg. 301.6651-1(e), you must also show that you exercised ordinary business care and prudence in providing for the payment of the tax liability.
d. You may claim that enough funds were on hand but, as a result of unanticipated events, you were unable to pay the taxes.
e. Inability to pay is a factor when considering penalty relief if you show that, had the payment been made on the payment due date, undue hardship (as defined in Treas. Reg. 1.6161-1(b)) would have resulted. In the case where you filed bankruptcy, inability to pay is a factor if the insolvency occurred before the tax payment date.
f. Other Information to consider:

a.When did you know you could not pay?
b.Why were you unable to pay?
c.Did you explore other means to secure the necessary funds?
d.What supporting documentation, such as copies of bank statements do you have?
e. Did you pay when the funds became available?

6. Bad Advice – IRS

a. Bad Advice can be written or oral advice provided by the IRS, or advice provided by a tax professional. You have to show that you reasonably rely on the advice.
b. You have to show that you provided the IRS or the tax professional with adequate and accurate information, and the advice was specific to that information.
c. The IRS is required by IRC section 6404(f) and Treas. Reg. 301.6404-3 to abate any portion of any penalty attributable to bad written or oral advice furnished by their officer or employee.
d. If you fail to meet all of factors, you may still qualify for relief under reasonable cause, as discussed earlier, if you show you exercised ordinary business care and prudence in relying on the IRS’s written advice.
e. Bad oral advice has proof problems associated with it and needs more support.

i. Look at your prior tax history and prior experience with the tax requirements.
ii. IRS will argue that it provided you with correct information by other means (such as tax forms and publications)
iii. Is there any supporting documentation available such as:

1. Any notation of your question to IRS;
2. Documentation regarding the advice provided;
3. Information regarding the office and method by which the advice was obtained;
4. The date the advice was provided; and
5. The name of the employee who provided the information.

7. Bad Advice – Tax Advisor

a. In very limited instances, reliance on the advice of a tax advisor may apply to advice on a question of interpretation of law-a substantive tax issue.
b. Reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. Your responsibility to file, pay or deposit taxes cannot be excused by reliance on the advice of a tax advisor.
c. A good example provided by the IRS: The employer researched all available IRS publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were “contract labor” or employees. As a result, the tax advisor advised the employer that the workers were “contract labor.” However, the IRS later determined that the workers were “employees” and not “contract labor.”

8. Fire, Casualty, Natural Disaster, or Other Disturbance

a. Relief from a penalty because you suffered from a fire, casualty, natural disaster, or other disturbance should be identified and demonstrate that you were unable to access your records as the result of an accident, or you were hospitalized as a result and unable to file the return or pay the tax.
b. This may also be argued under the reasonable cause explanation above.
c. If an Official Disaster Area is declared affecting a wide area of taxpayers, the IRS often issues special instructions to facilitate evaluating the request for penalty relief.

9. IRS Error

a. An error can be any error made by the IRS in computing or assessing tax, crediting accounts, etc. such as:
b. A math error when manually computing a penalty,
c. An extension of time to file that did not post, or
d. Any other error, when it can be shown that (a) you did in fact comply with the law, and (b) the IRS did not initially recognize that fact.

The penalties that you are assessed can be put into certain categories: Accuracy-Related Penalty is regulated by 1.6664-4, Failure to Pay Penalty is regulated by 301.6651-1(c), Failure to File Penalty is regulated by 301.6651-1(c), Failure to Deposit Penalty is regulated by 301.6656-1(b), and 301.6656-2(c), Information Returns Penalty is regulated by 301.6723-1A(d), and 301.6724-1, Preparer/Promoter Penalties is regulated by 1.6694-2(d) and 301.6707-1T.

If you or you business have been contacted by the IRS and if you are looking for a tax lawyer to compromise, negotiate, or effectively deal with the IRS, or if you or your business is in need of tax litigation, or tax defense, we, the Michael Ablan Law Firm can help you. With an experienced and aggressive yet honest, trustworthy and friendly legal team consisting of a lawyer with 35 years of experience, specialized paralegals, and a tax accountant, the Michael Ablan Law Firm in La Crosse, WI can help you. We also have offices in La Crescent, Minnesota and Hayward, Wisconsin. Contact us for a free consultation. Our expert legal services are available to you anywhere in the State of Wisconsin including but not limited to the counties of La Crosse, Trempealeau, Monroe, Crawford, Vernon, Grant, Jackson or any other county in Wisconsin or in the state of Minnesota, including all counties surrounding La Crescent, MN, such as Houston and Winona and any other county.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, if any U.S. federal tax advice contained in this communication, (including any attachments) is not intended or written to be relied upon or used, and cannot be relied upon or used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction of matter addressed herein.