Penalty Abatement

[Lion EA]

Filing 2021 and 2022 for a client dying of cancer, who has been very, very sick since early 2021/late 2020. 2021 especially has a large penalty. If we hope to have that penalty abated, do I have her pay it along with the tax and interest now? Or, pay everything except the penalty?

If she should pay the penalty now, how would we get it back later?

Part 2: try for reasonable cause? Or, just go with FTA?

[Lion EA]

Not that it matters, but I had the dates off. She was diagnosed in 2022 and was very, very sick late 2021 into 2022 making the rounds of doctors until her diagnosis and then treatment and now nothing more can be done.

[BulldogTom]

Can she afford the tax bill?   Does she still have an income?   If she can't work and is living off savings, you may be able to get her into currently uncollectible due to severe financial hardship.   

If she can pay the tax bill, have her pay that but not the penalty, but you need to request the abatement right away.  Communication with the IRS is key.

Tom
Longview, TX

[Lee B]

This website maintained by an ex IRS employee should answer your questions:

https://www.irsmind.com/irs-penalties-and-penalty-relief/

[Lion EA]

Thank you both.

She's on SS and RMDs from her IRA. 2022 she drew out about 3X her RMD from her IRA. She also has an investment account that she's spending down on her medical care; I don't know her balances. She did say that the $20,000+ for these two years will wipe her out. I don't think it'll wipe out her principal, but she will be selling more to generate cash. Probably a huge hole in her stocks.

(She had a great broker and did well in the stock market; we kept up with ES. When the market turned down, she owed little to nothing with her broker carefully harvesting her losses. I stopped her ES. In the two years she was too sick to gather her documents for me, the market went up, her broker did a good job, but she was out of losses to sell. Suddenly I have her last two years in my lap with new SS, new RMDs+, and net CGs, resulting in large taxes plus large P&I. I'm trying to keep her stress level down. She has an infusion today. I'll get her signatures this afternoon, if she's up to it. She gives me checks to mail for her.)

Her out-of-state son visited my client a few weeks ago. He called me to say he knew he should try to gather her tax documents, but didn't have time. He asked if he could wait until she died to deal with it all a once! Then my client called to tell me she does NOT want her son dealing with her taxes. That's when she put together 2021 and 2022. Except her broker and investments and IRA were at First Republic that collapsed. It's taken me time to get all that. I think I have everything.

That website is very helpful, cbslee. It is a bit ambiguous re whether to pay and then ask for FTA or reasonable cause/Form 843/letter or not to pay the penalty first, but it is clear that IRS collections efforts could begin if not paid. I think this client and her stress level might choose to pay (even though the thought of paying is stressing her out). The wait appears to be 2-3 months to a year.

Do you all suggest I phone today/Monday/Tuesday to try for FTA on the older year? Is it possible it could be immediate so I can coordinate my client mailing a check for the revised amount?

I don't have a POA. Should I get that now? It'll only last until she dies, but hopefully I can make some progress re abatement.

Again, thank you.

[NECPA in NEBRASKA]

I would get a POA now. The IRS will need it in order to talk to you. I'm sorry for your client and you. 

[Lee B]

First Republic has been taken over by JPMorganChase. Your client should have received communications about that along with contact information.

[Lee B]

Take this with a grain of salt since I don't deal with these kind of clients:

When you have the returns prepared, pay the tax and interest ( not the penalty) via direct debit or Direct Pay.

Then file the penalty abatement request.

Remember the POA will take 5 to 7 weeks to be processed. 

Don't know if it would be possible with this client, but in the past I have dealt with the POA processing delay by making phone calls together with my client in my office.

[Lion EA]

Client didn't have her new broker contact, thought it'd been on her online screen and that there'd been a Tax Documents tab, but neither were still there when she began gathering her tax info. She did have the cell for her old First Republic broker who's now elsewhere. He gave me the name of the FR manager, and he got the new rep for my client to send me the FR documents.

Client's still at her infusion site from this morning even though she thought she'd be home this afternoon. I could try a bringing in a 3rd phone, but haven't done that before so will need to practice. And, need to wait until she's home or a more private location. We go to PA next week for granddaughter's 4th birthday party.

Client will pay via paper checks only. I tried again with current circumstances to get her to use direct debit or IRS's online DirectPay. She'll need to move funds around before mailing checks, but I want to get the returns e-filed to stop the P&I on filing from growing.

I have a POA ready for her signature along with the 8879s and other documents. Should I put anything other than "Income" for Matter; I've seen suggestions to add a line for Civil Penalty. If I do that, do I say 1040 on the same line as Civil Penalty (as well as on the line for Income)? Anything else I should know about the POA?

[Catherine]

Pay tax, pay interest, do not pay penalty. Call with client or wait for POA. 

Put "penalty abatement, civil penalty" on the line below the 1040 on the POA. Include at least a year before the trouble started and one year after (2019-2024).

[Max W]

File returns and pay tax only.  

POA can be gotten on a conference call with client and IRS.  

POA should cover 2005 to 2026  (you never know what can show up and you may be able to get more than one Penalty abatement). You don't have to put penalty abatement on the 2848.  Also, put ACA 2014 to current year (no form name or number).

first try to get a FTA by calling PPL.  To get a FTA, the prior 3 years to the penalty year have to be clean (except for ES penalty.) If they reject you can appeal it, but if it fail then go to reasonable cause.

[Lion EA]

Thank you, all. Going to start calling Tuesday on this situation. Have paperwork ready. The 2022 penalty is only $70, but the 2021 is 4 figures so will get FTA probably. Otherwise, this client is clean, just got behind a year when she was very sick and ultimately diagnosed with colon cancer.

A similar but more complicated client (died suddenly in January, court-appointed rep in FL, hadn't filed in 6 years, might be ID theft in 2020, need to get 2019 filed since she always had refunds, etc.) is the other one I'm working on. IRS saying a balance due plus P&I for 2020, but don't think she filed 2020, so that's why ID theft suspected. Gotta get the ducks in a row on this one.

[Lee B]

Lion, it sounds like you are going to be very busy.

I am so very thankful, I don't any clients like these.

Live long and prosper