Penalty Abatement. Basics & Techniques. With Tanya Baber, EA, PA, CTRS Tax Edge, Inc. & Ted Ferrin Director at Canopy.

Transcription

1 Penalty Abatement Basics & Techniques With Tanya Baber, EA, PA, CTRS Tax Edge, Inc. & Ted Ferrin Director at Canopy Sponsored by: Easy-to-Use Tax Resolution & Practice Management Software Try it risk-free at

2

3 } Penalty Overview IRM Part 20 Penalty and Interest Chapter 1 Penalty Handbook } Types of Relief and Techniques RCA Introduction FTA (First Time Abatement) Program Reasonable Cause considerations

4

5 } Number of penalty provisions increasing 1955 there were 14 provisions Now there are more than 100 Continues to grow } Designed to encourage compliance But may cause liability to increase substantially } Penalties range across every type of tax Most Common Penalties: Estimated Tax Penalty Collection Related Accuracy Related

6 } Estimated Tax Penalty Treated more like interest Rate of this is same as current interest rate Underpayment of tax rate (3% in 2015)

7 } FTF (Failure to File) Failure to file required return by due date (including ext) 5% of unpaid tax Accrues 5% for each month (or partial month) Up to five months At that point reaches the maximum of 25%

8 } FTP (Failure to Pay) If full amount of tax balance is not paid by due date.5% of the unpaid tax Accrues.5% each month (or partial month) Continues accruing until it reaches 25% max Remember: An extension of time to file does NOT allow an extension of time to pay!

9 } IF BOTH the FTF and FTP apply Penalty cannot exceed 47.5% of the unpaid tax However, it is nearly 50% of their unpaid tax assessed If they are not in compliance with filing and paying And adding interest to this can end up being substantial

10 } Failure to Deposit (FTD) } If IRS does not receive required deposit (payment) on time In correct amount Paid in the correct manner Penalty can be assessed } Unpaid balance 1-5 days late 2% 6-15 days late 5% More than 15 days late 10% If still unpaid 10 days after notice is given: 15% max } If required to be by EFT another 10% could apply

11 } Trust Fund Recovery Penalty (TFRP) } If business does not pay trust fund portion Employment Taxes withheld Can be assessed against any of the individuals responsible For collecting, accounting for, or paying these trust fund taxes } Penalty 100% of the trust fund portion Assessed on individuals personally (Civil Tax Penalty) Does not cause Double-Payment Instead forces individuals to pay personally for what they neglected to pay for business

12 } Commonly imposed as result of examination } Audit or notice Underreporting income } If substantially understated on tax return 20% of understatement can be assessed Substantial understatement = >10% of tax required to be shown on return Or $5,000, whichever is greater. ALSO if considered negligent Additional negligence penalty +20% of understated tax

13 } IRM } Artificial Intelligence Decision support interactive software program RCA determines if penalty relief will be granted Possible for an agent to override if necessary Often they may not know about this

14 } They are to perform other case research first Apply missing deposits/payments, adjust tax, research missing extension, etc. FTF, FTP, FTD All others possible too, but if by oral/written still run through RCA Software } Many references in IRM to the RCA } Sometimes success = persistence (doesn t always produce the same result)

15

16 } IRM: } FTA available for three types penalties FTF (Failure to File) FTP (Failure to Pay) FTD (Failure to Deposit) } More specifically Files timely but bal due NO Payment Files late payment (Full or partial) Files late NO payment Fails to file (SFR prepared) Audited additional tax assessed

17 } Designed as a one time option May want to pursue others first } Requirements: Taxpayer is in compliance Filed all required returns Owes and in Installment Agreement Or if no balance outstanding Made payments against balances due in last 2 yrs Three years prior to penalty are clean No FTF or FTP assessed

18 } Obtain account transcript Taxpayers can access own transcript, or others too Anyone enrolled in IRS e-services Can pull transcripts using just 8821 Circular 230 practitioners (EA, CPA, Attorney) Can pull with 8821 or 2848 Dates to pull for best FTA Recommend 1990-present Note: Even though taxpayers can pull own transcript can only go back 10 years. May not give them benefit if last 10 years don t qualify but there could be a great one going 25 years back

19 } Practitioner How to obtain transcript Call IRS request fax or mailed copy PPL Practitioners only Or e-help (Practitioners only) Use e-services to pull transcripts Store transcripts in e-services mailbox View, print, or download to import into Excel Can perform searches in Excel this way for codes Use commercial software tool to download Will also analyze them to produce a report One advantage easy to see ALL FTA Opportunities

20 } Practitioner How to analyze transcript Basically look for penalty codes FTF Code 166 FTP Code 276 Look for this in each year for the taxpayer There may be many code 276 that occur in each year Add all the code 276 together for accumulated FTP

21 } Practitioner How to analyze transcript To complicate, can be partial removal Actual return filed to replace SFR (reduces tax, reduces penalty) Amended return reduces tax due (reduces penalties) Remember Partial removal is NOT full removal Only happens because base amount of tax is reduced How do you tell if this happened? Code 161 Reduced/Removed FTF Code 271 Reduced / Removed FTP Code 197 Reduced / Removed Interest Keep in mind Interest is statutory only recalculation of tax can produce reduction/removal of Interest

22 } Practitioner Be sure you have POA Selected year you want to request FTA AND 3 years prior to that year too } Call/Write to the IRS (or help the taxpayer) } To call IRS PPS ( ) General line 800-TAX-1040 OR: Newly released Penalty Assistance Line ext 225

23 } Ask for First Time Abatement For SPECIFIC tax year Identify it so the agent won t go fishing for it } Will use RCA software } Should receive answer immediately If approved, will go through a script with you Will receive a letter (3503C) Based on good history of timely filing / paying Bonus: May also reduce the interest if base penalty amount reduced

24

25 } Basically our Good Excuse IRM } Can request by phone but there are dollar thresholds If request exceeds them can still send written request } Will use RCA software } Many types of Reasonable Cause outlined in IRM (Best to reference when possible)

26 } Ordinary Business Care and Prudence } Death, Serious Illness or unavoidable absence } Fire, casualty, or natural disaster } Unable to obtain records } Taxpayer subject to a mistake that was made } Relied on erroneous advice Also if written or oral advice from the IRS } Taxpayer was ignorant of the law

27 } IRM Making provisions to meet obligations when reasonably foreseeable events occur. Facts & Circumstances establish exercised a degree of care that a reasonably prudent person would but were unable to comply with the law Consider: Taxpayer s Reason Compliance History Length of Time Circumstances beyond taxpayer s control

28 } IRM For Taxpayer or immediate family only Example Spouse, sibling, parents, grandparents, children Issue must be addressed in a reasonable time after death or illness Show it caused other obligations to also be impaired Not just the taxes Need written proof of the illness or death Examples: terminal illness, surgery, substance or physical abuse, depression, disability, and emotional or psychological distress

29 } IRM Major disasters include hurricane, tornado, earthquake, flood, riot, casualty, or other emergency or disturbance. What steps were taken to comply? Did they comply as soon as it was possible to? Also consider if creates other reasonable causes Example: a fire may cause unable to obtain records If hospitalized due to accident death, serious illness or unavoidable absence Or a declared natural disaster IRS issues special instructions making relief available specifically for the event.

30 } IRM Was ordinary business care & prudence exercised? Why were the records unavailable? Why were these records needed to comply? When and how did they become aware they didn t have the necessary records? What other means were explored to secure the information? Why didn t they just estimate the information? And did they comply as soon as the missing information was obtained?

31 } IRM Generally, this does NOT keep with the ordinary business care and prudence standard and doesn t support reasonable cause However- Facts and Circumstances may illustrate they did comply When/how did they become aware of the mistake? How did they attempt to correct? Relationship between taxpayer and person relied on If mistake was not their own and they delegated the duty Did they take timely steps to correct mistake after it was discovered?

32 } IRM Relates to issues too technical/complicated for layperson. Did they hire preparer/consultant what is their level of understanding & knowledge (Tax Advisor-IRM ) Even if they hire someone, still responsible for reporting income to person hired Specific relief from accuracy-related pen IRC 6662 Was it due to a change in the law? Were they unable to have access to their own records? What is taxpayer s own education level?

33 } IRC 6404(f) and Treas. Reg } Written IRM Oral IRS required to abate penalty attributed to erroneous written advice provided by IRS This has been extended to include oral advice if appropriate However, if they do not meet the criteria, may still qualify if they show ordinary business care & prudence Was it reasonable to rely on advice? Is there a clear connection situation advice penalty? Prior history of tax compliance? Any supporting documentation? If oral documentation? ID, date, notes, method obtained?

34 } IRM What is their educational level? Have they ever been subject to the tax before or penalized? Were there any recent tax law changes? What is the level of complexity of the issue in question? Did the taxpayer show a reasonable good faith effort to comply?

35 } IRM Did an oversight by them or another party cause the noncompliance? Generally this does NOT keep with ordinary business care and prudence Relying on another person to perform a required act generally not sufficient to establish reasonable cause Is taxpayer s responsibility to file timely return and make timely deposits/payments. This responsibility cannot be delegated. Therefore, may not be good to rely on this as sole method to establish reasonable cause

36 May support extension of time to pay Must be more than an inconvenience to taxpayer Extension of time: Form 1127 Application of Extension of time for payment of tax due to undue hardship More than an inconvenience Treas. Reg (b) Show they would sustain substantial financial loss if required to pay tax on due date Only affects failure to pay (not failure to file) Financial records required to prove Review discretionary expenditures Were there unanticipated events or a bankruptcy?

37 Contact the IRS by phone or written request Use software to help with determination of eligibility for penalty abatement Use form letters to craft written request Use script to assist in calling agent

38 Software Canopy Tax Industry Resources CPA Training Academy Questions? Ted Ferrin Tanya Baber-

39 Tanya R Baber, EA, PA, CTRS Services offered: Consulting Wholesale Backroom Service Wholesale Full Service For the accountant that just needs a little assistance one-on-one for questions they have regarding a client or case, or some assistance with other technical questions that relate to the newly emerging industry niche of Tax Resolution or even assistance and consulting with Tax Return Preparation if desired. For the busy tax professional that wants to get started in the lucrative industry of Tax Resolution, but does not have the time or expertise to do all of the work. We can help to do some of the backroom service like form preparation and send it back to you ready to be signed by the client and sent to the IRS. This will free up your time and resources and allow you to still make a profit while representing your client. If you are a busy tax professional wanting to take advantage of the upcoming boom in IRS cases and grow their revenue by representing clients without devoting resources to work the case, we can assist you by fully handling the case and allow you to free up your time. You can then earn profit and grow your practice by allowing you to represent clients in the growing industry of Tax Resolution simply by meeting with them and allowing us to handle the legwork of working the case for you. If you would like to schedule a time to have a one-on-one consultation or request assistance with a case, contact TaxEdge at EDGE Hours: 8:30 AM - 5:30 PM MST info@taxedge365.com