Transcript Presentation Title

Penalty Games: Reducing IRS Penalties
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Penalty Games: Reducing IRS Penalties
Presenter(s):
Robert E. McKenzie
Arnstein & Lehr LLP
Chicago, IL
Website: www.mckenzielaw.com
Date: June 10, 2014
Time: 2:00-4:00PM Eastern
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Learning Objectives
• Upon completion of this webinar you will be able to:
• Identify some of the most common types of collection and accuracyrelated penalties
• Determine penalty periods and penalty rates
• Compute penalties the IRS will assess
• Avoid cascading penalties
• Define reasonable cause and determine if it can be used for penalty
relief
• Determine if a taxpayer has exercised ordinary business care and
prudence
• Identify the IRS’s preferred reasons for penalty abatement and relief
• Write an effective request for abatement of penalties
• Reduce tax penalties asserted by the IRS against your clients
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Origins
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TP files w/o payment
TP audited
TP loses in Tax Court
TP fails to file and IRS prepares a substitute for Return (SFR)
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Filed Return
• IRS receives return w/o payment and sends a bill in about 5
weeks
• Bill includes penalties and interest
• Rate dropped to 3% in October, 2011
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Bad Checks
The 2% penalty for bad checks or money orders
increases to a minimum of $25 applicable to
checks or money orders.
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FAILURE TO FILE TAX RETURN
• 5%: Max 25%
• 4.5% if FTP applied: Max 22.5%
• Coordination between FTF and FTP Penalty Rates
• Minimum Failure to File: The lesser of:
$100.00 or 100 percent of the amount required
to be shown as tax on the return. After 2008
penalty increased to $135.
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Failure to Pay Tax (FTP)
• 5%: Max 25%
• 1% after Sec. 6331 Notice: Max 25%
• .25% after acceptance of an installment agreement: 8.5%
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PENALTY COMPUTATION
• Example 1 Failure to File and Failure to Pay Form 1040
• Return Due Date (041599) - Tax year 1998
Code Date Received Amount
• TC 150 122699
• TC610 112199
• TC660 061798
Comments
$1,753.00
Amount of tax on return
$953.00
Payment received with the return
$800.00
Estimated tax payment
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PENALTY COMPUTATION
• $ 953.00
–x
•
•
.045
$ 42.89
x5
$214.45
Amount per month
Number of months
Failure to file penalty
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Review Questions for Self Study CPE:
Now’s the time to answer the review questions 1-3.
Click here:
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*Please leave quiz window open and wait to submit until prompted to
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PENALTY COMPUTATION
$ 953.00
X .005
$ 4.77
x
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$ 38.16
$ 214.45
+ 38.16
$ 252.61
Amount per month
Number of months
Failure to pay penalty
FTF
FTP
Total penalty
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Fraudulent Failure to File
• 15% per month
• Max 75%
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FAILURE TO DEPOSIT PENALTY
• ⋅2 percent for deposits 1-5 days late,
• ⋅5 percent for deposits 6-15 days late,
• ⋅10 percent for all direct payments and those deposits made
more than 15 days late , but paid on or before the 10th day
following notice and demand.
• ⋅15 percent (actually, a 5 percent addition to the 10 percent for
late payment above for all undeposited taxes still unpaid after
the 10th day following the first balance due notice or the day on
which notice and demand for immediate payment is given
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Cascading Penalties
IRC Sec. 6656
• Right to direct payments to timely deposits
• IRS computer uses an unfair system
• Example:
Company owes weekly deposit of $10,000
Misses first deposit
Pays remainder of deposits on time
IRS applies each deposit to the prior week
5% penalty on $120,000 = $6,000
10% penalty on one deposit of $10,000 = $1,000
Total penalty $7,000
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Cascading Failure to Deposit Penalty
Correction:
One late $10,000 deposit = $1,000
NET SAVINGS:
$6,000
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REASONABLE CAUSE
• Any reason that establishes a taxpayer exercised
ordinary business care and prudence but was unable to
comply with the tax law may be considered for penalty
relief.
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Ordinary Business Care and Prudence Ordinary
• Ordinary business care and prudence includes making
provision for business obligations to be met when
reasonably foreseeable events occur.
• Facts and circumstances showing the taxpayer exercised
ordinary business care and prudence (taking that degree of
care that a reasonably prudent person would exercise),
but nevertheless was unable to comply with the law
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Reasons for Penalty Relief
•
•
Although the IRM provides:
“When considering the information provided in the
following subsections, remember that an acceptable
explanation is not limited to those given in IRM
20.1. Penalty relief may be warranted based on an
"other acceptable explanation," provided the
taxpayer exercised ordinary business care and
prudence but was nevertheless unable to comply
within the prescribed time.” See IRM 20.1.1.3.2.2,
Ordinary Business Care and Prudence.
•
Your chance of prevailing is better if you cite to one
of there favorite reasons
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REASONABLE CAUSE
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Death, Serious Illness, or Unavoidable Absence Pg. 14
Fire, Casualty, Natural Disaster, or Other Disturbance Pg. 15
Unable to Obtain Records Pg. 16
Mistake was Made Pg. 16
Erroneous Advice or Reliance Pg. 17
Ignorance of the Law Pg. 18
Forgetfulness Pg. 18
Statutory Exceptions or Waivers Pg. 19
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Statutory Exceptions
Legal Reference
Title
IRC 6654(e)(1), (2), or
Estim ated Tax Penalties (ES)
(3)
IRC 7502(a) and IRC
7502(e) (IRC 7502(e))
Timely Mailing Treated as Timely
does not apply to
Filing and Paying
deposits due after Dec.
31, 2010)
IRC 6724(a) or IRC
W aiver; Definitions and Special
6724(c)
Rules, Information Return Penalties
Abatement of any Penalty or
Addition to Tax Attributable to
IRC 6404(f)
Erroneous W ritten Advice by the
Internal Revenue Service
Time for Perform ing Certain Acts
Postponed by Reason of Service in
IRC 7508
Com bat Zone. This provision
applies only in a Presidentially
declared Combat Zone
Authority to Postpone Certain
Deadlines by Reason of
IRC 7508A
Presidentially Declared Disaster or
Terroristic or Military Actions
IRM Reference
IRM 20.1.3
IRM 20.1.2 and
IRM 20.1.4
IRM 20.1.7
IRM 20.1.1.3.3.4.1
IRM 20.1.2.1.2.1,
Combat Zone - IRC
7508
IRM 25.16, Disaster
Assistance and
Emergency Relief
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REASONABLE CAUSE
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Undue Hardship Pg. 23
Written Advice From IRS Pg. 26
Oral Advice From IRS Pg. 26
Advice from a Tax Advisor Pg. 27
Official Disaster Area Pg. 28
Service Error Pg.28
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Reasonable Cause Assistant
• When you request reasonable cause relief IRS personnel use
a computer program: Reasonable Cause Assistant (RCA) to
determine if relief is appropriate. Pg. 28
• RCA relies on the skill set of the person completing the
computer generated questionnaire.
• You can enhance your clients chances of prevailing by citing
to the IRM & concisely setting forth the facts of your case
because it will reduce the chances of operator error.
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First Time Abatement
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RCA provides an option for penalty relief for the FTF, FTP,
and/or FTD penalties if the taxpayer has not previously
been required to file a return or if no prior penalties
(except the Estimated Tax Penalty, TC 17X) have been
assessed on the same MFT This First-time Abate (FTA)
aspect is an Administrative Waiver and does not carry any
Oral Statement Authority (OSA) dollar threshold.
The FTA Administrative Waiver can only apply to a single
tax period for a given MFT.
For example, if a request for penalty relief is being
considered for 2 or more tax periods on the same MFT and
the earliest tax period meets FTA criteria, penalty relief
based on FTA only applies to the earliest tax period, not all
tax periods being considered. Penalty relief for all
subsequent tax periods will be based on the showing of
reasonable cause (and absence of willful neglect).
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Abatement Request
• Submit separate for each period
• Ask for abatement based upon reasonable cause in first
paragraph
• Statement of facts
• Law
• Discussion
• Conclusion
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Sec. 6404
• Suspension of P&I. The time period where IRS suspends
charging P&I until a taxpayer has been notified of the
additional tax is extended from the current 18 months
to 36 months effective for notices after November 25,
2007
• Interest immediately after the IRS proposes a deficiency
• Exception: tax shelters
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Review Questions for Self Study CPE:
Now’s the time to answer the review questions 4-6.
Click here:
http://www.proprofs.com/quiz-school/story.php?title=NzI1Njc1J5M0
*Once all questions are complete please submit and close quiz
window.
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Questions?
Robert E. McKenzie
Arnstein & Lehr LLP
Chicago, IL
Website: www.mckenzielaw.com
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