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Former IRS Revenue Officers , tax specialists

Penalty Abatement’s and Re-assessments

IRM 20.1.1.3, Criteria for Relief From Penalties, provides guidance for determining if the taxpayer meets the criteria that will allow relief from a penalty. See Exhibit 20.1.1–3 of IRM 20.1.1, Introduction and Penalty Relief, for a complete list of Penalty Reason Codes.

The Service will abate the penalty for failure to file or pay when the taxpayer shows that the failure to comply was due to reasonable cause and not due to willful neglect.

Reasonable cause determinations must be based on the individual facts and circumstances of each case.

The reasonable cause exception under IRC 6651(a) requires:

1. the taxpayer to show to the satisfaction of the Secretary that the failure to file or pay was due to reasonable cause and not due to willful neglect. Reasonable cause requires the taxpayer to demonstrate that he exercised ordinary business care and prudence but was nevertheless unable to file/pay within the prescribed time. Willful neglect involves a conscious, intentional failure or reckless indifference.

2.Insufficient funds generally is not reasonable cause for failure to pay unless the funds were depleted due to unusual or unforeseen circumstances. For example, a taxpayer who incurs lavish or extravagant living expenses to the extent that the remainder of his/her assets and anticipated income is insufficient to pay his/her tax, has not exercised ordinary business care and prudence in providing for the payment of his/her tax liability.

Reasonable cause for failure to pay exists if payment of the tax would result in a significant hardship for the taxpayer.

For example, a taxpayer who was able to pay, but who needed the money to pay for necessary medical expenses, may be able to demonstrate that payment of the tax (in lieu of paying for the medical expense) would have resulted in a significant hardship. Similarly, significant hardship also exists if the taxpayer would only have been able to pay by liquidating assets well below fair market value.

Generally, the penalty for failure to pay should not be abated until the underlying tax has been paid in full: Continued failure to pay (beyond the effect of the “reasonable cause” ) may be evidence that the underlying reason for the failure to pay is willful neglect. However, abatement for reasonable cause may not be denied merely because the underlying tax has not yet been paid. Therefore, remove the penalty if the taxpayer had reasonable cause for the failure to pay, and there is no evidence of willful neglect. If the FTP penalty is abated for reasonable cause, and a subsequent review of the account shows that the taxpayer willfully continued in his failure to pay, the penalty may be reasserted in full, computed from the original penalty start date.

The penalty for failure to file can be abated for reasonable cause regardless of payment of tax, because a continued failure to pay would not constitute evidence that the failure to file was due to willful neglect.

Reasonable cause determinations for failure to pay must be made separately for each assessment (i.e., tax shown on the return, math error assessment, amended return, or deficiency). For example, a taxpayer may not have had reasonable cause for his failure to pay the tax shown on his return, while he may have had reasonable cause for his failure to pay additional tax assessed as a result of a math error correction.

When the failure to pay (FTP) penalty is abated for reasonable cause , the abatement should include the entire related penalty computed on the underlying tax liability, even if that penalty has not yet been assessed.
Example:

A taxpayer files his return and pays the tax he believes is due by the return due date. IRS processes the return and finds that an incorrect amount of estimated tax payments was claimed on the return. Accordingly, IRS bills the taxpayer for unpaid tax, plus penalty and interest. A couple of months pass before the cause for the discrepancy is found, and the taxpayer agrees that his tax is, indeed, underpaid. The taxpayer pays the tax and requests abatement of the penalty for paying late.

If the taxpayer’s penalty is abated for reasonable cause, that abatement must also include any penalty that has accrued since the notice of the original penalty assessment.

Examiners should address the reason for any failure to file or failure to pay when securing or examining returns where the penalty appears to apply. Making this initial determination will prevent the need for subsequent abatements.

Reasonable cause abatement requests must be documented via an adjustment with a source document.