Read the full transcript: Even when the tax is owed, the penalty can still come off
[00:00] Penalty abatement requests are typically going to come at the end of an audit, after you’ve received a notice of proposed changes. If that notice includes a penalty, you’re going to want to ask the auditor not to impose it.
[00:10] I had a client, Victoria, who was assessed significant penalties as a result of a change in filing status – from head of household, as it was reported on the return, to married filing separate, which was actually accurate.
[00:26] But there was a story there. Why was she reporting head of household instead of married filing separate? She had started working with her preparer before she was actually married, and that preparer, year over year, had never asked her whether her filing status had changed – or had misunderstood the position she was in with respect to the marriage, living together, and the kids.
[00:47] So the filing status was wrong. The tax was imposed at the audit. But through storytelling, we were able to convince the auditor and the manager not to assess the accuracy penalties, which would have significantly added to the balance due on top of the tax and interest already imposed.
[01:13] A penalty abatement request via reasonable cause to the auditor – that’s the magic term of art. You have to show that the taxpayer exercised ordinary business care and prudence and still, nonetheless, was unable to comply with the tax reporting requirements that ultimately led to the deficiency.
How I got an IRS penalty removed with a reasonable-cause penalty abatement request
Victoria came to me with significant penalties sitting on top of her tax bill.
Her return had been filed as head of household. The accurate status was “married filing separate”, and correcting it created real unpaid tax and interest that we didn’t dispute. The tax penalties were a different matter.
What made them beatable was the story behind the wrong status. Victoria had started working with her preparer before she was married, and year after year, that preparer either never asked whether her filing status had changed, or had misunderstood where she stood with the marriage, living together, and her kids. She hadn’t gamed anything; she’d relied on a professional who got it wrong.
We told that story to the auditor and the auditor’s manager. They agreed not to assess the accuracy penalties, the money that would have been stacked on top of the tax and interest she already owed.
Reasonable cause is the term of art the IRS listens for
A penalty abatement request lives or dies on two words: reasonable cause. That’s the magic term of art.
To win on it, you have to show the taxpayer exercised ordinary business care and prudence and still, despite that, couldn’t comply with the requirements that led to the deficiency. Reliance on a competent preparer is one of the strongest versions of that argument. If a taxpayer handed over complete and accurate information, chose a qualified preparer, and the preparer still filed the return wrong, that reliance is itself a defense. This “reasonable reliance on a professional” defense comes out of a Tax Court case Neonatology Associates, P.A. v. Commissioner.
A taxpayer experiencing a serious medical issue or a natural disaster can also meet the standard of reasonable cause. What matters is whether the facts add up to a reasonable person who tried and still fell short.
When to make the request
Penalty abatement typically comes at the end of an audit, once you’ve received a notice of proposed changes with a penalty attached. That’s the moment to ask the auditor not to impose it, and the ask is a narrative, not a form. The penalty printed on that notice isn’t the penalty you’re stuck paying if there’s a story the examiner and the manager can stand behind.
Facing penalties on top of a tax bill?
If an audit has ended with penalties added to what you owe or you can already see them coming, the time to build the reasonable-cause story is before you agree to anything. That’s a conversation worth having early. Contact us today for a confidential consultation. We’ll evaluate your case, explain your options, and help you take the next step toward financial stability.
