Tax Penalty Relief Amid the Pandemic
The COVID-19 pandemic will result in 2020 being one of the most difficult years for taxpayers. New relief provisions complicate tax and other financial matters for tax professionals who interpret and advise clients in dealings with the IRS. The nationwide shutdowns and the increased volume of mail have directly affected the IRS, adding to the complexities.
These circumstances likely mean that clients will need more help than usual, especillay with IRS penalty and collection issues. Below are some strategies and preferred practices used by Brink Tax when requesting penalty abatement from the IRS on behalf of clients.
Understanding THE 'IRM'
It's important to understand and refer to the IRS's Internal Revenue Manual (IRM). This administrative handbook explains the procedures IRS employees should follow in the course of their work. Part 20 of the IRM discusses penalties and interest. Specifically, IRM Section 20.1.1.3, Criteria for Relief from Penalties, spells out the four categories of penalty relief:
Correction of IRS error;
Statutory and regulatory exceptions;
Administrative waivers (e.g., first-time penalty abatement); and
Reasonable cause.
The underlying guidance for each category in the IRM gives practitioners the criteria needed to effectively fight penalties for our clients. Quoting IRS language and providing the IRM citation in a penalty abatement request can often help the IRS process requests quickly and improve the taxpayer's odds for successful penalty abatement.
FIRST-TIME ABATEMENT AND REASONABLE-CAUSE DEFENSES
At Brink Tax our preferred penalty abatement defense is either the first-time penalty abatement waiver or reasonable cause.
As a refresher, first-time penalty abatement is based on a clean compliance history and can be applied only against failure-to-file, failure-to-pay, and failure-to-deposit penalties. It does not apply to other types of penalties, such as the accuracy-related penalty. Essentially, it helps taxpayers who have an isolated, rare filing or payment compliance issue. But it is only available to use once every three years, meaning taxpayers should use it conservatively and consider the dollar amount of the penalty carefully to potentially preserve this option.
Reasonable cause is a facts-and-circumstances test where taxpayers spell out their situation and try to prove that they exercised ordinary business care and prudence. Many types of penalties allow for reasonable-cause defenses and can be applied to multiple tax years. The IRM describes categories of reasonable cause, several of which may apply to COVID-19 related issues and complications:
Death, serious illness, or unavoidable absence (IRM §20.1.1.3.2.2.1): For example, the taxpayer has been sick or caring for a loved one with COVID-19.
Fire, casualty, natural disaster, or disturbance (IRM §20.1.1.3.2.2.2): COVID-19 declared a natural disaster.
Unable to obtain records (IRM §20.1.1.3.2.2.3): Office closures and shutdowns may prevent taxpayers from obtaining their records on time.
Erroneous advice or reliance (IRM §20.1.1.3.2.2.5): Tax legislation came out quickly, yet guidance sometimes lagged, making it hard to effectively advise clients.
It's noteworthy that COVID-19 has been declared a natural disaster, and may help with proving reasonable cause. On March 13, 2020, then-President Donald Trump declared a national emergency under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, P.L. 100-707, avoiding governors' having to individually request emergency declarations. All 50 states, the District of Columbia, and four territories were approved for major disaster declarations to assist with additional needs related to COVID-19.
Often, a compelling reasonable-cause defense may argue multiple categories of the IRM, to show the taxpayer's circumstances were complicated but the taxpayer nonetheless exercised ordinary business care and prudence.
TAXPAYER RELIEF INITIATIVE
The IRS in November announced a new program, the Taxpayer Relief Initiative, to help taxpayers who are unable to pay their taxes because of the pandemic (News Release IR-2020-248). Taxpayers who are unable to pay their tax debt have always had options but now they have more flexibility with these agreements. The initiative also highlights reasonable-cause and first-time penalty abatement options to help with penalties.
Working with Brink Tax
For taxpayers who need a payment arrangement, Brink Tax typically waits until the tax is paid in full before requesting penalty abatement. The failure-to-pay penalty continues to accrue until the tax is paid in full. Because it is beneficial for clients to have the entire penalty removed and not just a piece of it, we wait until the balance is paid in full to request abatement of the full penalty.
Remember, those who do not request penalty abatement do not receive it. Many penalty issues can be resolved quickly over the phone with the IRS, other issues may require a straightforward letter to the IRS.
As we navigate this unprecedented time, Brink Tax continues to advocate for streamlined penalty abatement procedures. Fortunately, the IRS has now expanded the options taxpayers may use to lower tax penalties. Brink Tax understands how to utilize these options to help our clients obtain penalty waivers.