Federal Tax Penalty And Interest
Federal tax penalties and interest can be assessed against taxpayers by the IRS for a wide variety of reasons, such as Failure to File Tax Return when Due, Failure to Pay Tax when Due, Failure to File Correct Information Reporting Returns, Accuracy-Related Penalty on Underpayments, and Failure to Comply with Other Information Reporting Requirements. While this is certainly not all-inclusive list of every penalty that the IRS can assess, these penalties are common ones which are designed to penalize non-compliant behaviors.
According to the Internal Revenue Manual (IRM), tax penalties are intentionally designed to be severe in an attempt to encourage voluntary compliance and discouraging noncompliance while maintaining those penalties proportional to the offense committed. For that reason, there are more severe penalties for more serious or deliberate noncompliance behaviors, such as Tax Fraud or Filing an Erroneous Claim for Refund or Credit.
However, there are occasions when penalties and interest are incorrectly or unfairly assessed against taxpayers. In those instances, taxpayers may be eligible to request a penalty and/or interest abatement in order to reduce the tax liability owed.
The core argument for requesting penalty abatement is Reasonable Cause. In general, Reasonable Cause is based on the analysis and substantiation that a taxpayer exercised ordinary care and prudence in determining his/her tax obligation, but nevertheless failed to comply with that obligation. The burden of proof in requesting penalty abatement generally rests upon the taxpayer.
To determine if a taxpayer is eligible to request penalty abatement, the IRS considers a variety of factors, including (but not limited to) the following:
- Taxpayer’s Reason: The taxpayer’s explanation should address the specific penalty imposed and the dates and explanations should clearly correspond with events on which the penalties are based.
- Compliance History: Payment patterns for at least three years are examined when considering the taxpayer’s overall compliance history. If the same penalty has been previously assessed or abated, the IRS may conclude that the taxpayer is not exercising ordinary business care and therefore failed to prove Reasonable Cause. However, a first-time incident of non-compliant behavior does not by itself establish Reasonable Cause.
- Length of Time: The IRS takes into account the length of time between the taxpayer’s initial non-compliance and subsequent compliance. If the taxpayer is unable to meet his/her tax obligations due to circumstances beyond his/her control, yet complies with those obligations as soon as he/she is able to do so, Reasonable Cause may be considered.
- Circumstances beyond the Taxpayer’s Control: The IRS acknowledges that there are circumstances when unanticipated events occur that may prevent the taxpayer from fulfilling his/her tax obligations, even when the taxpayer exercised ordinary care and prudence in determining and attempting to meet those obligations. Even so, the IRS requires that the taxpayer attempt to meet his/her responsibilities, even though late, and show evidence of all steps taken in an effort to comply. Circumstances beyond the taxpayer’s control may include death, critical illness, and the inability to obtain records due to fire, serious injury or accident, natural disasters, or other significant disturbances.
Unlike penalty abatement, interest is not eligible for abatement due to Reasonable Cause. Abating or reducing interest is a more difficult task and will typically only be done if the IRS is at fault for a delay or error related to your taxes, and the taxpayer has not caused any significant aspect of the error or delay. Interest is determined on the amount of liability owed and calculated daily until the balance is paid in full. The IRS can still charge interest for any balance owed, even if penalties are reduced or abated.
When determining if the interest allocated was a direct result of an IRS mistake, the IRS will only consider errors due to Managerial and Ministerial acts. A Managerial Act is the administrative processing of a taxpayer’s information. Managerial errors that may result in interest abatement are mainly limited to instances where the IRS temporarily or permanently lost the taxpayer’s records. A Ministerial Act is the procedural processing of a taxpayer’s case in which the proper exercise of judgment or discretion did not occur.
As with penalty abatement, the burden of proof in requesting interest abatement generally rests upon the taxpayer. The bottom line is that unless the taxpayer can prove that IRS caused a considerable delay or error in the processing of his/her case, it is unlikely that the taxpayer will obtain interest abatement.
POSSIBLE OUTCOMES FOR PENALTY & INTEREST ABATEMENT REQUESTS
Once your penalty and/or interest abatement has been processed and evaluated, the IRS may conclude the following:
- Reasonable cause was established and therefore the penalty is removed, or abated;
- Reasonable cause was not initially determined based on the information/documentation provided. The IRS may provide additional instructions and/or request additional information;
- Reasonable cause was not established and the request is denied;
- Reasonable cause was partially established and a portion of the penalties may be removed.
Please contact Norman McKellar at 865-566-0125 for a FREE CASE EVALUATION to see if you qualify for reducing or eliminating your tax penalties and interest.
Contact Our Firm
For more information about any tax law matter or to see if you qualify for reducing or eliminating your tax penalties and interest, please contact our lead attorney, Norman D. McKellar, at McKellar & Easter, Attorneys at Law.
call 865-566-0125 or send us an email to make an appointment at one of three offices in Knoxville, Tennessee; Nashville, Tennessee; and Atlanta, Georgia. All initial telephone consultations are free and we accept credit cards for transactional work.