ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – BIDEN CANCELS TRUMP’S NEW INDEPENDENT CONTRACTOR TEST?ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – FRONT DOOR AND BACK DOOR PENALTY ABATEMENT STRATEGIES – PART 1
By Robert S. Schriebman
This is Part 1 of a 2 Part series that will discuss the best ways to abate IRS penalties. By the way, this will also apply to FTB penalty assessments.
Several years ago, I wrote the IRS Tax Penalty Handbook published by Commerce Clearing House (CCH). In that book I told my readers that most 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 1, I will discuss front door method. Part 2 will discuss back door method.
The Front Door Method
Most penalties are abated using the so-called front door method. These are the traditional methods for seeking total or partial penalty abatement. One of the most common way of abating penalties is to request the so-called “first time abatement.” This usually applies to late filing and late payment penalties. This does not depend upon reasonable cause standards. If you have complied with all filing and payment rules for the past 3 tax years, the IRS will give first-time penalty relief. You can orally request this relief by calling the IRS’ toll-free number and speaking to a collector. You can also send a written request in response to an IRS collection notice. Unfortunately, the FTB does not have a first time abatement process.
If you cannot use the first time penalty abatement request, you must base your penalty abatement claim upon reasonable cause.
Front-door penalties can be abated directly by the revenue officer assigned to your case. These are usually delinquency penalties and the penalty associated with employment taxes known as the trust fund recovery penalty (TFRP). On the other hand, the revenue officer cannot abate penalties classified as return-related penalties, such as negligence or fraud penalties.
For our purpose here in this article, assume that you are dealing with a type of penalty that can be abated directly by the revenue officer. If the revenue officer will abate the penalty, you have hit a home run with the least hassle and cost. There is a greater probability of penalty abatement at the revenue officer level than dealing with someone located at a service center campus. You must approach the revenue officer in a positive and professional manner. This means you must do your homework as to the reasons for the abatement and make a complete presentation.
Example: You have not filed federal income tax returns for several years. They are now prepared and ready to be filed. These returns were prepared due to a prior contact from a revenue officer demanding compliance. For the best results, file these returns directly with the assigned revenue officer. Don’t send them by mail, have a face-to-face conference. At the same time, you should also request a conference to discuss any late filing and late payment penalties. You should also have a completed IRS financial statement – Form 433-A for individuals and Form 433-B for a business. Don’t forget to provide all the required backup documentation stated in the accompanying instructions.
In addition to completing the returns, and the appropriate financial statement, etc., don’t forget the most important thing of all – money! Remember, it is the revenue officer’s job to collect money for the Treasury. Money makes the revenue officers world go around. If you cannot pay in full, a substantial partial payment showing good faith is essential.
Your reasons for requesting a penalty abatement based on reasonable cause should be clearly set forth with documentary evidence to back up your claim for leniency. If the revenue officer is receptive to your presentation, he/she will request that you put your abatement request in writing and submit it for formal approval by management.
With the passage of the collection due process (CDP) legislation signed into law by President Clinton, it is now possible to abate penalties during the CDP hearing with the assigned settlement officer. If the settlement officer does not see things your way, you may take your case to the US Tax Court or the US District Court and even appeal to the Federal Court of Appeals in your jurisdiction.
The above was meant to be an overview of the standards for reasonable cause, and the basic methods of abating penalties. It is always best to seek the advice of experienced tax professionals before deciding to go it alone. In Part 2, I will discuss the Back Door Method in light of the recent US Tax Court decision of Sheila Ann Smith v. Commissioner issued March 10, 2021.
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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