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Legal Procedures to Reduce and Eliminate Tax Penalties and Interest; Risks of Using Services

Last edited 51 days ago by Ted Broomfield

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Summary: This blog post is aimed at taxpayers who are subject to late penalties and interest for failure to file and failure to pay late. The blog is not intended to be comprehensive, but, practical and focused on taxpayers who do not dispute the facts but are seeking help in obtaining relief. There are significant opportunities, but taxpayers are well-advised to focus on the standards for granting these relief procedures rather than on the subjective desire that they be granted. There is no “magic bullet” to avoiding the consequences of non-compliance. Many CPAs and attorneys offer services to help. Those services may indeed spare the taxpayer the burden of applying and with higher quality applications those services may increase the likelihood of success. On the other hand, many CPAs and attorneys have received professional discipline for making promises of relief that are untrue. Caveat emptor - Buyer beware.

Four procedures to legally avoid paying penalties & interest for failure to file and/or pay

The shortest summary is that both California and the IRS offer one-time abatement of penalties, but generally, not interest, for taxpayers who have been compliant for each of the previous three years. California and the IRS also offer relief from penalties, and maybe interest, for reasonable cause. Importantly, reasonable cause means a very material event that directly prevented you from filing or paying, despite ordinary care and prudence. Tax authorities may be amendable to payment plans that usually include the taxpayer’s promise to maintain compliant. Finally, if a very factual and non-subjective analysis of the taxpayer’s ability to pay yields the conclusion that the tax debt is uncollectible, the tax authority may compromise.

Limitations on the four tools - These tools have nothing to do with your desire not to pay

The tax authority is a harsh master that is mostly totally indifferent to an individual’s feelings.

If you have not been compliant, you will not be eligible for one-time abatement.

Just because you think the matter is a reasonable cause, or even if the type of event is listed in what may be a reasonable cause, you still need to prove that that prevented you from filing and/or paying and that you used ordinary care and prudence. The event itself is insufficient.

A payment plan must be adhered to, or the consequences are severe.

Tax comprises are purely mathematical and are based on a formula of income and assets yielding what the tax authority will or will not accept. Subjective feelings or arguments are useless here.

First time penalty relief - almost automatic simply by asking & confirming, but former compliance required

You may qualify for First Time Abate for a penalty if you have a history of good tax compliance. You are considered having a good tax compliance history if you: (a) filed the same return type, if required, for the past 3 tax years before the tax year you received the penalty; and (2) you didn't receive any penalties during the prior 3 years, or any penalty was removed for an acceptable reason other than First Time Abatement.

The penalties that are eligible for First Time Abate include: (1)

Failure to File⁠

– when the penalty is applied to: (a) Tax returns –

IRC 6651(a)(1) ⁠

; (b) Partnership returns –

IRC 6698(a)(1)⁠

; or (c) S Corporation returns –

IRC 6699(a)(1)⁠

and (2)

Failure to Pay⁠

– when the tax: (a) shown on the return is not paid by the due date – ; or (2) required to be shown on a return, but was not, and that tax was not paid by the date stated in the notice or demand for payment under

IRC 6651(a)(3)⁠

; and (3)

Failure to Deposit⁠

– when the tax was not deposited in the correct amount, within the prescribed time period, and/or in the required manner.

You can learn more about the IRS first-time penalty abatement at the following website:

⁠

https://www.irs.gov/payments/penalty-relief-due-to-first-time-abate-or-other-administrative-waiver⁠

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As for the California Franchise Tax Board, the first-time abatement is more limited, as follows. The California FTB one-time penalty abatement is (a) a once-in-a-lifetime abatement; (b) available only to individuals subject to Personal Income Tax Law; and not applicable to fiduciaries, estates or trusts; as well as (c) applicable for taxable years beginning on or after January 1, 2022. The California FTB one-time penalty abatement is only for failure to file and failure to pay.

You can learn more about the IRS first-time penalty abatement at the following website:

⁠

https://www.ftb.ca.gov/pay/penalties-and-interest/one-time-penalty-abatement.html⁠

⁠

Reasonable Cause - If proved the event prevented filing/paying; care & prudence

The key for reasonable cause is not the event, but that the event actually prevented you from filing and paying, despite your ordinary care and prudence. Naturally, most taxpayers focus on the event, which was frequently very traumatic. However, what is subjectively traumatic does not necessarily mean that under the standard applied by the tax authority, that tax authority will conclude that the event actually prevented you from filing or paying or that you used ordinary care and prudence.

The point is the event was certainly traumatic to you, but the event was definitely not traumatic to the tax authority. The tax authority wants evidence as to how the event prevented you from filing/paying AND evidence of your ordinary care and prudence.

Excessive focus on the event and its subjective emotional impact on you while failing to provide evidence of how the event prevented you from filing/paying and evidence of your ordinary care and prudence may actually backfire when you are consuming the time of a professional who spends eight hours a day listening to people ask for forgiveness, many of whom will not qualify.

You can learn more about IRS Reasonable Cause at the following websites

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https://www.irs.gov/payments/penalty-relief-for-reasonable-cause#Reasonable_Cause⁠

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https://www.irs.gov/irm/part1/irm_01-002-001⁠

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You can learn more about the FTB Reasonable Cause at the following websites:

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https://www.ftb.ca.gov/pay/penalties-and-interest/help-with-penalties-and-fees.html⁠

⁠

https://www.ftb.ca.gov/forms/misc/2917.pdf⁠

Payment Plans

A payment plan is an agreement with the IRS to pay the taxes you owe within an extended timeframe. You should request a payment plan if you believe you will be able to pay your taxes in full within the extended time frame. If you qualify for a short-term payment plan you will not be liable for a user fee.

Taxpayers can apply online through the

Online Payment Agreement tool⁠

or apply by phone or by mail by submitting

Form 9465, Installment Agreement Request⁠

The benefits of a payment plan include: avoiding accruing additional interest and penalties; avoiding offset of your future refunds; avoiding issues obtaining loans.

You can learn more about IRS Payment Plans at the following website:

⁠

https://www.irs.gov/payments/payment-plans-installment-agreements#request⁠

⁠

The California Franchise Tax Board also offers installment plans, with similar general terms, but different specifics. Taxpayers can apply using either Form

3567⁠

, or by telephone at (800) 689-4776. There are numerous material

terms⁠

that a taxpayer must agree to.

You can learn more about FTB Payment Plans at the following website:

⁠

https://www.ftb.ca.gov/pay/payment-plans/terms-and-conditions.html⁠

⁠

Offers in compromise; waiver of tax amounts

In the past, the subjective nature of the standard of waiving tax payments combined with the historical decentralized lack of control and reputedly corrupt nature of the system led to widespread “abuse,” of the processes by which waivers were obtained. In other words, whether your tax amount was waived and your requirement to pay was forgiven could be negotiated and could depend on how much you were willing to do. Note, this blog does not condone or encourage illicit conduct.

Today, the pendulum has swung in the other direction.

IRS Collections has almost no discretion in waiving or forgiving amounts of tax owed. Almost all authority to forgive tax owed is based on a mathematical formula of the taxpayer’s assets and income that yields numeric results showing what portion of the tax is effectively uncollectible.

You can learn more about offers in compromise at the following website:

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https://www.irs.gov/pub/irs-pdf/f656b.pdf⁠

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https://www.irs.gov/forms-pubs/about-form-656⁠

⁠

You can learn more about the California Franchise Tax Board offers in compromise at the following website:

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https://www.ftb.ca.gov/forms/misc/4045.html⁠

⁠

Risks and Rewards of using CPAs and/or Attorneys to seek relief - Caveat Emptor

Many CPAs and attorneys offer services to help. Those services may indeed spare the taxpayer the burden of applying and with higher quality applications those services may increase the likelihood of success. On the other hand, many CPAs and attorneys have received professional discipline for making promises of relief that are untrue. Caveat emptor - Buyer beware.

Four procedures to legally avoid paying penalties & interest for failure to file and/or pay

Limitations on the four tools - These tools have nothing to do with your desire not to pay

First time penalty relief - almost automatic simply by asking & confirming, but former compliance required

Reasonable Cause - If proved the event prevented filing/paying; care & prudence

Payment Plans

Offers in compromise; waiver of tax amounts

Risks and Rewards of using CPAs and/or Attorneys to seek relief - Caveat Emptor

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