Transcript Presentation Title

Penalty Games: Reducing IRS Penalties
Presenter(s):
Robert E. McKenzie
Arnstein & Lehr LLP
Chicago, IL
Website: www.mckenzielaw.com
Date:
Time: 2:00-4:00PM Eastern
Origins
•
•
•
•
TP files w/o payment
TP audited
TP loses in Tax Court
TP fails to file and IRS prepares a substitute for Return (SFR)
2
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
3
Bad Checks
The 2% penalty for bad checks or money orders
increases to a minimum of $25 applicable to
checks or money orders.
4
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.
5
Failure to Pay Tax (FTP)
• 5%: Max 25%
• 1% after Sec. 6331 Notice: Max 25%
• .25% after acceptance of an installment agreement: 8.5%
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
PENALTY COMPUTATION
$ 953.00
x
.045
$ 42.89
x5
$214.45
Amount per month
Number of months
Failure to file penalty
PENALTY COMPUTATION
$ 953.00
X .005
$ 4.77
x
8
$ 38.16
$ 214.45
+ 38.16
$ 252.61
Amount per month
Number of months
Failure to pay penalty
FTF
FTP
Total penalty
Fraudulent Failure to File
• 15% per month
• Max 75%
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
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
Cascading Failure to Deposit Penalty
Correction:
One late $10,000 deposit = $1,000
NET SAVINGS:
$6,000
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.
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
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
REASONABLE CAUSE
• 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
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
REASONABLE CAUSE
•
•
•
•
•
•
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
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.
First Time Abatement
•
•
•
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).
Abatement Request
• Submit separate for each period
• Ask for abatement based upon reasonable
cause in first paragraph
• Statement of facts
• Law
• Discussion
• Conclusion
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
Thank you for participating in this webinar.
Below is the link to the online survey and CPE quiz:
http://webinars.nsacct.org/postevent.php?id=13529
Use your password for this webinar that is in your email
confirmation.
You must complete this survey and the quiz or final exam (for
the recorded version) to qualify to receive CPE credit.
National Society of Accountants
1010 North Fairfax Street
Alexandria, VA 22314-1574
Phone: (800) 966-6679
[email protected]