ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – BACK DOOR PENALTY ABATEMENT STRATEGY – PART 2
By Robert S. Schriebman
This is Part 2 of a 2 Part series that will discuss the best ways to abate IRS penalties.
Several years ago, I wrote the IRS Tax Penalty Handbook published by Commerce Clearing House (CCH). In that book I told my readers that penalties can be abated due to something called “reasonable cause.” The standard for reasonable cause was akin to ordinary business care and prudence. The Internal Revenue Manual, Chapter 20, adopts this standard and sets forth the following 9 criteria for penalty abatement:
- Death, serious illness or unavoidable absence
- Fire, casualty, natural disaster or other disturbance.
- Inability to obtain necessary records.
- Lack of funds.
- Ignorance of the law.
- Error or forgetfulness on the part of the taxpayer or a subordinate.
- Reliance by taxpayer on the advice of a competent tax advisor.
- Receipt by taxpayer of erroneous oral advice from the IRS.
- Receipt by taxpayer of erroneous written advice from the IRS.
There are essentially two roads you can take to have penalties abated. I call them the “front door” method and “back door” method.
In this Part 2, I will discuss back door penalty abatements.
Back Door Method
There are two major “back door” roads that I recommend you should consider: a) the audit reconsideration process; and b) whether the IRS has followed proper internal procedures when asserting a penalty.
The Audit Reconsideration Process
An audit reconsideration is essentially a second bite at an IRS audit. This process may be used to abate penalties that were assessed by the Examination Division. The most common example is when a taxpayer misses the opportunity to challenge the audit by failing to respond to a Statutory Notice of Deficiency or 90-Day Letter. A 90-Day Letter is also known as a “ticket to the Tax Court.” For one reason or another a taxpayer who had been audited did not timely file a petition in the US Tax Court, or the taxpayer filed a late petition. Now that the period for contesting the audit assessment has expired, the taxpayer’s case had been transferred to the IRS Collection Division and has been assigned to a revenue officer. The taxpayer may have also received a Collection Due Process (CDP) Notice.
Even though there is an outstanding bill owing to the IRS, the taxpayer who missed the boat when it came to protecting his/her rights, now has a second bite at the apple, so to speak. At this point in time, the taxpayer can request an audit reconsideration. This request will put the brakes on the IRS’ ability to collect while the taxpayer is afforded a new opportunity to rebut the audit and to request that penalties be abated due to reasonable cause. The IRS may assign the reexamination to a collector who will work in conjunction with an auditor to reevaluate the results of the audit and to reconsider the assertion of penalties. The IRS may also send the audit reconsideration request to a centralized location devoted solely to handling reexaminations.
In order to receive an audit reconsideration, the taxpayer must be able to show that he/she would have a right to contest the case if an appropriate refund action was instituted. Most taxpayers receive an audit reconsideration if they can show either a settlement officer or revenue officer that they were unaware of any proposed deficiency. During the audit reconsideration process, all collection activity comes to a screeching halt.
If you are considering requesting an audit reconsideration, be prepared. You must make every effort to submit all evidence substantiating your position concerning audit adjustments as well as proving reasonable cause for the abatement of penalties.
In conclusion, you must remember that an audit reconsideration is not a matter of right. It is a privilege granted to a chosen few. The granting of the audit reconsideration, or its denial, is usually solely within the discretion of your revenue officer. If you believe the revenue officer has denied your request unjustifiably, contact the supervisor or the Problem Resolution Officer. The burden is always on the taxpayer and his representative to persuade the revenue officer that a reexamination is necessary. The audit reconsideration is also available in a CDP proceeding.
Did the IRS Dot All Their “I’s” and Cross all their “T’s”
No penalty can be properly asserted against the taxpayer unless and until that penalty has been approved in writing by an IRS supervisor. This was the situation involved in the recent US Tax Court Smith decision. Sheila Ann Smith v. Commissioner US Tax Court, T.C. Memo 2021-029. (March 10, 2021). In this case a penalty against the taxpayer was thrown out by the Tax Court for failure to obtain written supervisory approval.
“IRC § 6751 is the section governing the proper procedure before a penalty can be legally asserted. In the Smith case, US Tax Court Judge Halpern said the following, § 6751(b)(1) provides: No penalty under this tile shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher-level official as the Secretary (of the Treasury) may designate. Written supervisory approval must be obtained before a § 6702(a) penalty is assessed, Kestin v. Commissioner, 153 TC at 29, but it need not be obtained before the Commissioner send the taxpayer a Letter 3176C giving him/her the option to recant and avoid the penalty, id. at 30 (added).”
How do you tell if the IRS dotted all the I’s and crossed all the T’s? Obtain Form 8278 that will show if proper supervisorial approval was obtained. You can ask the IRS to produce this form if you are in a CDP hearing or your matter is in the hands of a revenue officer for collection. You may also obtain a copy of the form through the Freedom of Information Act (FOIA).
My motto has always been, “Never take a penalty lying down – get up and fight it.”
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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