We Help With IRS Penalties & Interest
You probably found us by searching for “IRS penalty attorney” or “tax penalty attorney.” Or you may have searched for an answer to the question, “How can I get rid of IRS penalties and interest?” Regardless of how you found us, we are glad you did.
We are a tax law firm in Houston, Texas, and we help with IRS penalties and interest.
About IRS Penalties
“Penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the [Code].” I.R.M., pt. 220.127.116.11 (Nov. 21, 2017).
The IRS’s training materials put a slightly different spin on this concept. If you are subject to penalties you may find this offensive, but the IRS’s spin on this is that “penalties encourage voluntary compliance by demonstrating the fairness of the tax system to compliant taxpayers and by increasing the cost of noncompliance.” If you are subject to penalties, you are probably not thinking that penalties demonstrate fairness.
This concept of fairness is belied by the sheer number of penalties the IRS can impose. There are more than 150 different types of civil penalties, additions to tax, and additional taxes the IRS can impose. These penalties can apply to a wide variety of acts and inactions.
Common IRS Penalties
The most common penalties are “additions to tax.” This includes penalties when taxpayers fail to submit timely tax returns, fail to pay their taxes timely by the due date, or fail to make timely estimated payments by the due date.
Other common penalties include:
- Accuracy-related penalties;
- Fraud penalties;
- Certain information returns and payee statement penalties;
- Tax return preparer penalties;
- Promoter and protestor penalties; and
- Compensation statements, pension plans, exempt organizations, education programs and other reporting penalties.
The amount of the IRS tax penalty can range from less than 1% to 100% of the underlying IRS tax liability. Some penalties accrue monthly and others are only imposed once.
IRS tax penalties and interest can often exceed the amount of the underlying IRS tax debt.
The accuracy-related penalty warrants special mention. This penalty is usually assessed at the close of an IRS audit. The penalty is imposed for:
- Negligence or disregard of rules or regulations (I.R.C. § 6662(b)(1))
- Substantial understatement of income tax (I.R.C. § 6662(b)(2))
- Substantial valuation misstatement (I.R.C. § 6662(b)(3))
- Substantial overstatement of pension liabilities (I.R.C. § 6662(b)(4))
- Substantial estate or gift tax valuation understatement (I.R.C. § 6662(b)(5))
- Disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law (I.R.C. § 6662(b)(6))
- Undisclosed foreign financial asset understatement (I.R.C. § 6662(b)(7))
- Inconsistent estate basis (I.R.C. § 6662(b)(8))
Each of these failures can trigger a penalty. The IRS generally has the ability to not impose these penalties and to abate them once assessed. In most penalty abatement cases, one has to be able to show “reasonable cause” to have the penalties not imposed or abated after they are imposed.
There are several other penalties that the IRS can impose. Each penalty has its own nuances and defenses.
The Burden of Production for Tax Penalties
The burden of production also warrants consideration. The IRS has the burden of production for penalties if the taxpayer is an individual (not a corporation).
This means that the IRS has to put on evidence showing that the penalty is appropriate, such as proof that the taxpayer did not file a return, understated their income, etc.
The IRS does not have to put on evidence to rebut any defenses, such as the reasonable cause defense. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001), which is the leading court case for the concept that penalties are not appropriate when taxpayers make honest mistakes.
How Can I Get IRS to Waive a Penalty?
We are often asked, “Can a lawyer help with IRS penalties?” The answer is often yes. The IRS has the authority to not impose or remove most penalties based on “reasonable cause.” It can remove some limited penalties based on its “first-time abate” policy.
Reasonable Cause as a Defense
Reasonable cause is based on all the facts and circumstances in the situation. The IRS will abate most penalties based on reasonable cause if the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless is unable to comply.
Reasonable cause may be based on:
- Reliance on a tax advisor
- Death, serious illness, or unavoidable absence
- Fire, casualty, natural disaster, or some other disturbance
- Inability to obtain records
- Ignorance of law in conjunction with other facts & circumstances
- Misfeasance by employee or agent leaving taxpayer “incapacitated” or “disabled”
- Financial hardship
These are just a few of the more common justifications for penalty abatement. They can apply to mistakes triggered by a bookkeeper and, in some cases, erroneous tax advice. The courts sometimes impose additional requirements to justify penalties in some cases.
You can find summaries of reasonable cause court cases here.
First Time Abatement
This refers to an IRS policy whereby it will abate penalties for taxpayers who have a good compliance history. Good compliance history means that the taxpayer has not had these types of penalties in the prior three tax years.
This policy is only applied to a few types of penalties, such as failure to file and failure to pay penalties.
How to Request Abatement of Tax Penalties?
You may also be wondering, “How do I request abatement of tax penalties?”
There is no IRS abatement form provided by the IRS to get penalties removed. Penalty abatement is more complex than this. The method for removing the penalty depends on several factors. It may be as easy as a phone call to the IRS, require a detailed written letter, or even require a refund claim to be submitted. There are also penalties and situations where the only remedy is to sue the IRS in court. And yes, as with everything with the IRS, there is often a due date that has to be met for some of these remedies.
There are nuances for each, which is where an experienced tax attorney can help. The tax attorney can find the right method for getting the penalty abated and increase the chances that the IRS acts timely and favorably on the request.
Remove IRS Interest
Interest on tax debts begins to accrue from the time that the tax liability was to be paid, which is typically the date the tax return was filed or should have been filed.
The IRS often waits many years before notifying taxpayers and taking action to collect unpaid taxes. This delay can result in the tax debt incurring a large amount of interest. This interest is then added to the underlying tax debt and is fully collectible by the IRS.
The interest rules can be complex. This complexity results in the IRS collecting more in interest than it is entitled to collect. An experienced tax attorney can help to ensure that taxpayers do not pay penalties and interest that they are not obligated to pay.
Tips for Removing Penalties & Interest
The most effective way that taxpayers can reduce or eliminate IRS tax penalties and interest is to show that they do not owe the underlying tax liability.
Another way is to show that there was an unreasonable delay attributable to the government, that the taxpayer relied on bad advice from the government, or that the taxpayer was not timely notified of his or her tax liability.
The IRS may be willing to negotiate a reduction in tax penalties and interest, especially if the taxpayer can show that they made an honest mistake.
Get Legal Help With Your IRS Penalties
We are experienced tax attorneys in Houston, Texas. We help clients remove or abate IRS tax penalties.
If you have a tax penalty and you want it removed and want to talk to a tax lawyer, we want to hear from you. Please call us at (713) 909-4906 or schedule an appointment to get help abating your penalties.