ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – PENALTY ABATEMENTS – HOW TO DO IT WRONG – HOW TO DO IT RIGHT
By Robert S. Schriebman
Most of the penalties that I encounter in my practice are delinquency penalties. These are late filing and late payment penalties, and they are by far the most common. These penalties may be removed or abated if a proper presentation is made to the IRS, FTB or EDD. This article will discuss what it takes to remove late penalties according to the US Supreme Court.
Before discussing the basic standards for relief, I will discuss the so-called “quickie abatement.”
After discussing the quickie abatement, we will look at recent California administrative decisions, the Kohl and Salado cases decided by the Office of Tax Appeals.
The Quickie Abatement
This rule is also known as the first-time rule. In the IRS Manual there are provisions for late filing and late payment relief if this is a first-time violation. First time does not mean once in a lifetime. It means that you have had no violation in the last three years. You can ask for this relief over the phone or in writing. A client recently informed me that she called the IRS after getting a bill, and informed them that this was her first violation and requested abatement. The penalty was removed over the phone.
The Standard of Reasonable Cause
Back in 1985, the US Supreme Court issued its decision in Boyle, 469 US 241 (1985). The Court defined reasonable cause to mean the exercise of ordinary business care and prudence. In other words, it does not require superhuman effort. What would the ordinary business person do under the circumstances?
The IRS Manual codified reasonable cause in 9 areas, the most popular of which are as follows:
- Death, serious illness, or unavoidable absence.
- Fire, casualty, natural disaster
- Inability to obtain necessary records.
- Lack of funds.
Recent California Administrative Decisions
The Office of Tax Appeals (OTA) recently issued decisions in March and August of 2020. These decisions are Kohl and Salado.
The Kohl Case
Mr. and Mrs. Kohl failed to file FTB returns for the years 2015 and 2016. After a series of notices, and proposed assessments, the FTB issued late penalties and a stiff 25% demand penalty. The Kohls argued that their failure to respond to the FTB occurred despite the exercise of ordinary business care. The Kohls asserted that they had reasonable cause for failure to timely file because they suffered a series of hardships that caused them to be unable to timely manage their affairs. They cited family health issues as well as increased hours of work. Many of these events occurred as far back as 2013. The OTA stated that difficulties suffered by a taxpayer, such as the serious illness of the taxpayer or a member of his/her immediate family, are circumstances which the courts have acknowledged may constitute reasonable cause. The OTA further stated that penalty abatement is not available if the difficulties at issue simply caused the Kohls to sacrifice the timeliness of one aspect of their business affairs to pursue other aspects. They sacrificed their filing obligation in order to pursue other aspects of their business affairs and this does not establish reasonable cause.
The Kohls did not offer any written documentation to back up their reasons. They basically stood in front of the judges and told them their story. This is not the way to win your case.
The Salado Case
Salado told the OTA that his assets were frozen by the federal government and he was also incarcerated during the tax year in issue. However, Salado failed to provide any records to establish his arguments. The OTA set forth the basic standard of reasonable cause. The taxpayer must show that the failure occurred despite the exercise of ordinary business care and prudence, or the reason for failure existed as would prompt an ordinary intelligent and prudent business person to have so acted under similar circumstances.
Conclusion – Doing Things the Right Way
I am a long-time advocate of providing paper proof when seeking penalty abatement. I have practiced this faithfully and taught these principles to my graduate students at USC, as well as countless professionals. IF you are seeking abatement due to illness, you must provide copies of medical records and letters from attending physicians. Documentation is the key to everything! The Kohls and Salado lost their arguments because they did not furnish any written documentation. Verbal excuses do not win the day. Never give any government agencies original documents as the chances are, they will get lost and you will never see them again. Copies only please!
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 40 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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