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By Gail Perry
Employees at the Greenwood, Ind.,
office of the Internal Revenue Service were more than a little
surprised a few weeks ago when a disgruntled man pointed a gun
at a revenue officer saying, "You can't do this. You can't
take my money like this."
No one was injured and the man was arrested, but it leads
one to wonder about a system that brings out such a violent
response from someone who clearly wasn't satisfied with his
tax situation.
IRS spokesperson Pat Brummer was at the scene of the
Greenwood incident.
"That's not really a good way to negotiate," she quipped.
"We obviously don't want people to talk to us that way. We
want them to talk to us face to face. People need to know they
can sit down and talk; there are many avenues to negotiate."
While accountants may attempt negotiation with the IRS on a
regular basis, many taxpayers may be surprised to learn that
the IRS is open to negotiation. In particular, the IRS has the
ability to be flexible in the area of penalty reduction or
abatement for late filing of tax returns and for underpayment
of taxes.
Excuses,
excuses
When arguing for a penalty waiver or reduction based on
reasonable cause, each case is considered on its own
merits. But here are some examples of successful, and
not-so-successful, attempts at penalty abatement.
Excuses that might work
* Natural disasters, like fires, hurricanes, floods,
tornados - a non-preventable event that somehow results in
an inability to process tax documents.
* An individual responsible for a function necessary to
the completion of the tax return is unexpectedly
unavailable.
* Tax professional in full possession of the facts gave
wrong advice to the taxpayer, who had no reason to have
knowledge to the contrary.
* Computer crashes or other computer-related problems.
* Family emergencies, including, but not limited to,
illness and death in the family.
* Financial hardship resulting from an unexpected
emergency.
* Tax or payroll service provider with history of
timely filing and payment does not file or pay tax amount
on time.
* New business, not aware of responsibility to file.
Excuses that don't work
* Giving your tax return to a tax professional to mail.
"The failure to make a timely filing of a tax return is
not excused by the taxpayer's reliance on an agent, and
such reliance is not 'reasonable cause' for a late filing
under 6651(a)(1)." United States v. Boyle, 469 U.S. 241
(1985)
* Not having enough money. The IRS expects you to plan
ahead and budget for your taxes.
* Too young to pay tax. There's no such thing.
* Assumed that the withholding at work would be enough
to cover the tax bill.
But that's just the tip of the iceberg. Here's a Web
site with 315 excuses for late filing or payment (it
should be noted that all have been rejected by the IRS or
the courts):
http://members.tripod.com/Madtbone/tax_excuses.htm
The above link was
taken down recently. The data has been modified and
mirrored here:
http://traderstatus.com/MadtboneTaxExcuses01.htm
update: The original's back, and it is better than
ever!
http://madtbone.tripod.com/tax_excuses.htm |
The IRS's operation handbook, the Internal Revenue Manual,
sets out general rules for negotiating penalty abatement. The
ability to grant relief from penalties falls into four
categories: reasonable cause, statutory exceptions,
administrative waivers and correction of service error.
Taxpayers and preparers find that there is flexibility in the
area of reasonable cause when it comes to negotiating a
settlement for a penalty.
"Reasonable cause is something that really is a
facts-and-circumstances test," said Marvin Michelman, director
of tax controversy services at Deloitte Tax. "You have to look
at everything involved, what caused the problem, how quickly
did someone act to remediate it."
The IRM states, "Reasonable cause relief is generally
granted when the taxpayer exercises ordinary business care and
prudence in determining their tax obligations, but is then
unable to comply with those same obligations."
"You have to look at all the facts and find that one fact
that demonstrates why the penalty should be abated," said
Michelman. He also recommended writing a "very fact-specific
letter, explaining all the steps you have taken."
For example, if a taxpayer blames a computer crash for a
belatedly filed tax return, Michelman explained that the
taxpayer should be able to present records showing when the
crash was discovered, that it was worked on, what information
was stored on the computer, and how the crash prevented the
taxpayer from meeting the deadline.
Turnover in personnel can cause problems that result in
late payment or late filing penalties. "In small businesses,
we see a lot of heads of business or heads of bookkeeping who
had an illness or there was an illness in the family, and
there was no way for the business to file on time. The IRS
reacts favorably [in terms of penalty abatement] to illnesses
in the family of the person responsible for the books," said
Dan Wilds, director at the PricewaterhouseCoopers national tax
service in Washington.
"Turnover is a big deal" in small businesses as well, said
Ruth Perez, also with the PwC national tax service. But
turnover alone isn't enough to warrant an abatement. "The
small business would have to say that even though an
accountant quit, we immediately started looking for someone
else. It's not that we dropped the ball and we have no one
responsible for tax any more," explained Perez.
When it comes to late payments, past history is extremely
important. "The IRS does look at compliance history," said
Perez. She explained that the service will look back over
several years to see if there have been late payments in the
past.
"The same penalty, previously assessed or abated, may
indicate that the taxpayer is not exercising ordinary business
care," according the manual. Even if this is the first time
that a taxpayer has made a late payment, that alone is not
sufficient cause to abate the penalty. The IRM states that the
compliance history will be weighed with other reasons that the
taxpayer gives for the late payment.
Norman Neubauer, manager of tax training for Kansas
City-based H&R Block, pointed out that a penalty for late
filing is one penalty that shouldn't be incurred in the first
place. "Even if you don't pay the tax on time, if you file the
return on or before the due date there is no penalty for
filing late, so Tip No. 1 is just not to incur the penalty in
the first place."
Eric Smith, a spokesperson for the IRS, agreed. "A lot of
people still remember the old rules where you could not get an
extension without estimating the tax and submitting a payment
with the extension request," he said. "You still have to
estimate the tax due and make a reasonable estimate, but in
order to get the extension you no longer have to make a
payment with the extension request."
The IRS offered five suggestions for including information
in an explanation letter:
1. What happened and when did it happen?
2. During the period of time the taxpayer was
non-compliant, what facts and circumstances prevented the
taxpayer from filing a return, paying a tax or otherwise
complying with the law?
3. How did the facts and circumstances prevent the taxpayer
from complying?
4. How did the taxpayer handle the remainder of their
affairs during this time?
5. Once the facts and circumstances changed, what attempt
did the taxpayer make to comply?
Smith pointed out that ignorance of the law is not
ordinarily considered an excuse worthy of abatement.
"The other thing is maintaining a clean history," Michelman
said. "If this is the first time you've ever been penalized,
that shows you've really tried to comply. There was this one
footfall, but you were working hard to avoid it. When the IRS
looks at your record, they will be able to see that you've
never had a problem." |
