It's not the tax, it's the interest and penalties, is there anything I can do

It’s not the tax; it’s the penalties and interest. That’s what gets you. If I had a nickel for every client that said, “Hey, I would pay the tax but it’s the penalties and interest that are killing me,” I’d be a millionaire. So what do you do about the penalties and interest in an IRS problem case? Well, here’s the harsh truth. Interest, not abatable by law, unless, in certain circumstances where you can prove that you relied upon written erroneous advice from the IRS, then you can have interest abated. Is that going to happen? Not for most of the people I speak with. We don’t have written erroneous advice from the IRS so interest is not going to be abatable.

Now that I made that big bold claim and I made it seem like that was the case in every case, let me explain a little tiny loophole, and that is, if you can get penalties abated, then the interest associated with those penalties can be abated.

What does abate mean? Abate means to eliminate or reduce. So you can have penalties abated for a reasonable cause. What does reasonable cause mean? Reasonable cause means a darn good reason. It’s pretty simplistic, isn’t it? But really, that’s what it means. It means, was there some particular good reason that you failed to file on time, that you failed to pay on time?

What are examples of good reasons that you could prevail in penalty abatement? Some of those would be a divorce, drug addiction, physical problems, hurricanes, other natural disasters, earthquakes, tornadoes, alcoholism, drug abuse – those types of things that are not reasonably foreseeable.

What’s reasonably foreseeable mean? Well, my torts professor back in law school would probably be turning over in his grave, but what it means is, was it reasonably foreseeable that this event would occur? I just defined that term with it in its definition so that probably wasn’t that clear.

Is it reasonable that you would have known that this could have happened? So are hurricanes reasonably foreseeable? Well, I think they are; I happen to live in a coastal area of a coastal state, but the IRS tends to think that hurricanes and hurricane damage are not particularly reasonably foreseeable and therefore, that can’t be reasonable cause.

I would suggest that in my practice that over the years, the people with longer track records of having compliance problems, have a lesser ability to get penalty abatement. What does that mean? If you have 5-10 years, where you didn’t file or pay on time, it’s kind of unlikely you’re going to find a good enough reason that you’re going to get all of those penalties abated. It makes sense, right? But on the other hand, if you have a smaller window of time; 2, 3, 4 – maybe even 5 years where you can demonstrate that you are undergoing physical problems or someone maybe very close in your family, your spouse or one of your children were going through certain problems and that caused your head not be in the game and therefore, you didn’t file and pay on time, you have a chance.

You can also get partial abatement of penalties. What does that mean? It means that certain years – maybe the early years, maybe one year – the penalties are abated and it’s certainly something to try.

How do you get penalty abatement? You write a letter to the IRS. The penalty abatement request must be in writing. I suggest that they also be sent certified mail, return receipt requested.

Where do you send them to? You can send them at pretty much any address in the IRS because they’re going to go ahead and treat the same. They tend to ignore penalty abatement requests quite often, so that’s the reason for the certified mail. You need to state with specificity and particularity what exactly it is you’re asking to be abated and why you think you deserve those penalties to be abated. If you’re dealing with a revenue officer, send it to the revenue officer, but make it very clear that that’s what you’re asking for.

A denial of penalty of abatement can actually be appealed. You appeal a denial of penalty abatement by using something called a CAP Appeal and typically, if you get a denial letter there will also be instructions with the letter telling you how to appeal that. If you send in your penalty abatement letter and between 30 and 90 days have lapsed and you haven’t heard anything (and that would be probably the normal case), then you can actually contact the Office of the Taxpayer Advocate and file a Form 911. Actually, dealing with a taxpayer advocate is going to be the topic of a different video but when you file a 911 in this particular instance, what you’re doing is you’re going to complain about the length of time in which they have failed to answer you. The taxpayer advocate should help you with your penalty abatement process.

In the appeal, if you have to do that, I’m going to suggest that you continue to hold your position and you stand your ground and you try to convince the IRS Appeals Officer that you are deserving of at least partial relief.

Now, I’ve had really good cases that I thought were a slam dunk for penalty abatement that I didn’t win, and I’ve had cases that I thought it was ridiculous to go ahead and ask for it, that we did win. I think that penalty abatement can be a strong component of most IRS problem cases.