Penalty Abatement Statements – A Humorous Example

Taxpayers have the right to request relief from penalties assessed by the Internal Revenue Service. The IRS sets very specific criteria for the granting of penalty abatements. It can be very difficult to demonstrate that a taxpayer’s circumstances meet the criteria for penalty relief. Most of the time, we will request a written statement from the taxpayer explaining the circumstances that lead to the accrual of their tax liability, and then use that to create our own penalty abatement request that fits to one of the IRS criterion, cites case law, etc.

Most of the time, taxpayer’s have some reason for not paying their taxes that ties back to not having the money to do so. Lack of funds does not meet IRS reasonable cause criteria, but the circumstances behind the lack of funds sometimes can be reasonable cause.

Occasionally, the taxpayer’s explanation for failing to pay their taxes doesn’t leave us with a lot to work with. On rare occasions, we receive an explanation that is quite humorous.

This example is from a taxpayer that elected to continue NOT paying his taxes because it was financially convenient. With a struggling business, a divorce, and alimony and child support to pay, the taxpayer was experiencing financial hardship. He wrote:

I financed [business] shortfalls with credit card advances and soon I had unsupportable credit card debts and many other expenses…

As things started to turn around for the taxpayer, he continues:

In early 2001 I noticed that I somehow had enough money to pay my bills. Later, I discovered that I had inadvertently neglected to call in the 941 payment [for fourth quarter], even though the check had been generated by the accounting program. I was consternated but simply didn’t have the money to make good.

This is a common reason as to why people miss a Federal Tax Deposit, often several in a row. They then try to make it up when they can. However, in this case:

I expected a notice from the IRS daily, but nothing happened and when it was time for the next 941 payment I thought, “This is the kind of tax relief I need right now.” As an expedience, I didn’t pay the 941’s for the next several months and used the respite to get back on my feet financially.

Doing this enabled the taxpayer to get current with his vendors, credit cards, etc. He skipped his payroll tax payments for 7 months, then started making them again. By this time, he was on a debt management plan for the rest of his debt, and the business was doing better. However, the taxpayer recognized that this course of action had consequences attached.

Again, the initial non-payment was an unintentional oversight. However, it was so useful in preventing bankruptcy, staying in business, and becoming solvent that I didn’t make another payment for 7 months. By that time I was in good shape and haven’t had serious problems since. I’m grateful to Uncle Sam for the loan, though it is a little like borrowing from the Mafia. However, I’m ready and able to make restitution.

Needless to say, this was an exceptionally difficult penalty abatement for us to craft, and we obviously did not submit this in the form submitted to us by the client. This is actually still an active case, and we are awaiting IRS review of our actual abatement request.

This example, while humorous, illustrates how taxpayers can get in further trouble with the IRS after an initially unintentional oversight. It also illustrates the choices that business owners are having to make in order to stay in business.

IRS Penalty Abatement Sample Letter

The penalties assessed by the IRS are the often the biggest thing that people dislike about having a tax problem, and for good reason: The penalties added to your tax liability can often DOUBLE how much you owe.

The process of obtaining a reduction of IRS penalties is called a “penalty abatement”. While there is a form for claiming a refund of taxes paid in and requesting an abatement of some limited penalties under limited circumstances, there is no general form for requesting an abatement of penalties under special circumstances, even circumstances that meet the IRS reasonable cause criteria.

I’ve been using a very successful template letter for several years as my starting point in all my penalty abatement cases. Half the time, this letter is all I need, but it sets the groundwork for Appeals if necessary. This letter has actually been the basis for achieving millions of dollars in IRS penalty abatements.

This particular penalty abatement letter template is the result of over 100 hours of case review in search of the perfect U.S. court cases to support the arguments, and dozens more hours of tweaking and perfecting the exact language used so as to create the perfect penalty abatement letter for use with clients.

This letter does require some finesse to use, as it is meant to be used by tax professionals knowledgeable about tax code and with experience preparing penalty abatements. Because of that, I’m also going to provide you with a short “Quick Start Guide” showing you how to use this penalty abatement sample letter.

In addition, you’re also going to receive a handy guide for what to do if the IRS rejects your initial application for relief from penalties. If they reject your application, they are required to tell you why, and you also have Appeals rights that come with that rejection. It never ceases to amaze me the simple, straightforward penalty abatement applications that are initially rejected, but then accepted almost immediately by an Appeals officer.

Hiring a tax professional to write your penalty abatement application letter will typically cost between $750 and $1,000. To get instant access to the most powerful penalty abatement letter templates available for a tiny investment of only $97, simply click the “Buy Now” button below and proceed to our secure payment processor.

Here is everything you receive in this offer:

  • Three powerful penalty abatement sample letters
  • Quick start guide to applying for IRS penalty abatements
  • A handy Appeals Guide in the event your initial application is rejected

IRS Penalty Abatement Sample Letter Kit – Only $97!

Order Now!

IRS Penalty Abatement Reasonable Cause Criteria

One of the most common questions we are asked has to do with the reduction of interest and penalties on IRS accounts. Any reader of this blog knows that I am adamant about correcting the myths, lies, and half-truths perpetuated by tax resolution salespeople, and the IRS penalty abatement is one of the things least understood and grossly overhyped by salespeople in our industry.

First of all, let’s get this out of the way: There is no reasonable cause interest abatement application process within the IRS. It simply doesn’t exist, period. If somebody is telling you they can get your interest reduced, you’re straight up being lied to, and you should seek assistance elsewhere.

There are two, and precisely two, instances in which interest is reduced:

  1. Any IRS employee gives you false information, which you acted on and resulted in the interest. This is one reason why all IRS correspondence should be conducted and follow up in writing.
  2. Since interest is calculated based on the tax liability, if an amended return is filed and the tax itself is lowered, then the interest is also reduced.

Now, on to penalties. The IRS charges dozens of different types of penalties, but the three that we most commonly talk about are the late filing penalty, the late payment penalty, and the penalty for not making Federal Tax Deposits. These three penalties combined can add a whopping 65% to your total IRS bill. If your tax debt is more than two years old, you’ve maxed out all these penalties, and therefore over half your total debt is penalties.

The IRS does actually have a compassionate side, and it’s generally found in the penalty abatement process. Penalty abatement applications can also be appealed if initially denied, so you can always get a second set of eyeballs on the issue. The thing to keep in mind is that the IRS has very strict guidelines for granting penalty abatements, and these guidelines are referred to as “reasonable cause criteria”.

It should be noted up front that “we didn’t have the money” is NOT a reasonable cause criteria. A drop in revenue, by itself, is insufficient argument for obtaining penalty relief. Any request for penalty abatement simply citing the economic recession will be immediately denied.

Why is this? Here is the IRS’ logic: You made the money, and should have paid the taxes at the time on that money. If you are self-employed and receive a check, then you HAD the money, you simply didn’t give the IRS their chunk of it. Same goes with payroll taxes, particularly trust fund taxes (money you withhold from employee paychecks for income tax and Medicare/Social Security): If you had the expectation to pay some amount of wage, then you theoretically HAD the money sitting somewhere to pay that person, and should have withheld it and turned it over to the IRS. If you couldn’t cover the taxes, you shouldn’t have had the employee and should have laid people off or cut back their hours.

There are ways to argue around this, and we have done so very successfully, but there has to be some other circumstance. For example, you had the money to pay the tax, but paying the tax instead of something else would have created an “undue hardship”. Examples could include a large medical expense that unpaid would have left a condition untreated, or a court ordered payment that would have resulted in other legal consequences, or a bill such as a large automobile repair which would have left you unable to work and resulted in job loss. These arguments are difficult to make and require significantly more work than standard reasonable cause criteria applications, but they CAN be won.

The primary IRS penalty abatement reasonable cause criteria center around natural disasters, loss or destruction of vital business records, bad advice from the IRS or an accounting professional, criminal activity, medical issues, substance abuse problems, and other serious circumstances.

A couple years ago I developed a standard list of questions to ask clients to assist me in preparing their penalty abatement. This list of questions should be given some serious thought before requesting penalty abatement, as you are more likely to get what you want if it covers one of these areas:

  • Were any business records lost or destroyed?
  • Were there any circumstances that led to a substantial drop in collecting on accounts receivable?
  • Was there any transition in the business that lead to the failure to pay taxes?
  • Was there a death or serious illness that directly affected the business or personal wages?
  • Was there any embezzlement of funds, theft of valuable property, or identity theft?
  • Were there any alcohol or drug abuse issues that affected the business or wage earning capability?
  • Was there a natural disaster that impacted you or your business?
  • Did you rely on the advice of a CPA or IRS employee in making tax decisions?
  • Were there any circumstances that created substantial financial hardship, to the point where your business was close to going bankrupt?

These questions cover all of the IRS reasonable cause criteria to one extent or another, so finding an answer to your personal or business situation that covers one or more of these questions is the key to a successful penalty abatement application.

Ready to apply for your own IRS penalty abatement? With my IRS Penalty Abatement Sample Letter Kit, you’ll receive several successful sample application letters, a complete guide to writing and submitting your application, as well as complete instructions for appealing a penalty abatement denial. Click here to learn more.