Taxpayer accuracy penalties as a result of audit.

[Jack from Ohio]

Does anyone have experience with getting accuracy penalty applied, as a result of an audit, reduced or abated?

Client was audited for 2010. Her record keeping was atrocious.

Audit resulted in additional tax of $10,000 due to underreporting of income both personal and as a sole proprietor. Client insists that she should ask for reductions or abatement.

Auditor has stated that the only way she would abate the client accuracy penalty is if preparer penalties were imposed. Now we have documented all the information that was given to us as well as the responses to questions we asked. There was no discussion during the audit about our processes or accuracy.

Second question: Has anyone heard this "one or the other" penalty position the auditor is taking?

I am looking for additional answers to give to the client to help her understand that she should "leave this Pandora's Box closed."

[Mr. Pencil]

There was no discussion during the audit about our processes or accuracy.

Section 6662 is very hard to get around because one of the triggers is simply the dollar amount--a "substantial underpayment" is 10% of the total tax and more than $5000. There are several other ways to get caught, such as lousy records and misstating the value of assets, but your agent doesn't have to bother with that because of the amount. You have a right to request her workpapers. and can be open about it being to see how the penalty was calculated.

It can be abated for reasonable cause. Reliance on a professional is a common excuse, but your agent has already warned you that it will backfire. The other best reasons are adequate disclosure and substantial authority, neither of which seems helpful for you. So you are probably limited to finding external events that prevented the taxpayer from complying. Death in the family, disaster loss, records sealed by a court--some significant third-party event that could not be foreseen or controlled. It should be something you can actually document. It is possible to request partial abatement if you can only show reasonable cause for some of the issues.

Of course IRS has no statutory authority to abate the interest, but if you sweet talk the agent there is a small chance she will accept that as enough punishment. I believe that it helps to focus on the future. Document that the taxpayer has taken specific steps to make sure the problems will not happen again. You can also point to the past if the taxpayer has a good history of timely compliance.. After all, that is the basic reason for penalties. You can take a penalty to a supervisor, but your chances of success there are very small. Probably even worse in Appeals and Tax Court.

[SaraEA]

I agree with Mr Pencil that you should go ahead and ask. Write the letter as he suggests (under the client's name) showing that the client has reformed her ways. Charge for your time, and make in clear in writing that there are no guarantees that the IRS will accept the excuse. We do this fairly often in our practice. The only purpose in some of these cases is to demonstrate to the clients that you are going to bat for them, are there for them trying to fight the nasty ole IRS (which is only doing its duty and following the law!). Sometimes we get surprised and the IRS abates. The real point of the exercise is client relations. Also, these are the type of desperate people who will go to one of those "penny on the dollar" places. Your being there for them might prevent that, so your effort will end up saving them a ton of money even though they end up paying the penalty that by law they are required to pay.

[jshtax]

I have had some attorneys strong arm the IRS to get those penalties removed but that is about only way I have seen it done.

[bertrans]

I have had some attorneys strong arm the IRS to get those penalties removed but that is about only way I have seen it done.

I hope many of you agree with me when I say that the statement attributed to the IRS auditor, viz., that she could 'consider' abating the penalty if there were preparer penalties involved is an obliquely made and/or obliquely reported view that she may consider abatement if the TP can credibly demonstrate reliance on a 'competent' professional (You just gotta love that adjective!). What is your client's history in this regard? New preparer? Same preparer - same errors? Also, the 6662 penalty,subdivided into accuracy-related and substantial understatement, has both similar and different criteria. The central criterion of the Sub penalty is that the TP failed to provide, on the return, the information needed for the correct computation of tax; for the Accuracy, the central criterion is credible evidence that the TP wilfully, recklessly and/or NEGLIGENTLY ignored the applicable law. They are both open to relief on the basis of reasonable cause. Phew!

[ILLMAS]

We were lucky to get them removed in appeals, I am even afraid to disclose how it happened publicly