Appeals Officer Authority

[Jack from Ohio]

Client was just audited for 2005 & 2006. Results went to appeals. Appeals officer accepted more information and made changes. Client owes $4K in taxes and $3k+ in late filing penalties (both returns filed after extension dates) and about $1,200+ in interest.

The client is single and mid 40s.

Now my question. Her father called us and asked if the appeals officer could make any changes in the penalties and interest. Never having faced this question in any manner I could not give him (Daddy) an honest answer and told him I would investigate.

Now I throw this question out to all the great and experienced tax preparers on here hoping that someone has dealt with this issue before.

I am not losing sleep over this, because the increase in audit was caused by taxpayer not having documentation for business expenses reported in the given years. However, I did promise to investigate.

Any wisdom or experinces you have would be greatly appreciated.

[jainen]

>> authority to abate interest & penalties<<

Basically the IRS has no legal authority whatsoever to abate interest (except in limited circumstances such as government delay or as part of an offer in compromise). Anyway it's cheap, so don't even bother trying.

Most penalties can be dismissed for various reasons, according to different provisions of the tax code. If you are asking about late payment penalty, it can be abated for "reasonable cause." That generally means the problem was caused by an outside force over which the taxpayer had no control. Although that wouldn't seem to fit your client, the IRS is fairly easy-going on the point. They have an enlightened attitude that the purpose of penalties is to ensure future compliance, rather than punish past errors. It's worth asking about, especially if you have some half-baked story about what happened to the original documents but you can show SPECIFIC steps taken to make sure it never happens again.

[TAXBILLY]

The following are guidelines that IRS uses. They may be applied, when clearly established, to any situation where penalties are not to be asserted or are to be eliminated because of reasonable cause.

Death or serious illness of the taxpayer or a member of his or her family. Unavoidable absence of the taxpayer. Destruction by fire or other casualty of the taxpayer's residence, place of business or records. The taxpayer is unable to obtain records necessary to determine the amount of tax due for reasons beyond his or her control. The taxpayer mailed his or her return in time to reach the appropriate IRS office but, due to no fault of the taxpayer, it was received timely. The taxpayer did not file his or her return or pay the tax after receiving erroneous information from an IRS employee or competent tax advisor. Any other explanation that establishes that the taxpayer exercised ordinary business care and prudence but was, nevertheless, unable to comply within the prescribed time.

If the taxpayer is a corporation, the guidelines apply to the individuals within the corporation who have authority for attending to tax obligations.

Events that occur after the last date prescribed for payment—this is normally the tax return due date—are not relevant in making a determination that reasonable cause for waiving the penalties exists.

In the case of penalty for failure to pay timely, a taxpayer is bound by regulations to set aside funds for payment of tax due as the liability accrues. Lack of funds or generally poor business conditions are not acceptable reasons for failure to make timely payment of taxes, particularly withholding taxes collected from others. Taxpayers must be able to demonstrate that no funds were available to pay the tax due despite their best efforts. An example of this would be lack of “cash in the bank” to pay tax resulting from a "paper gain." Making a business decision to pay other bills you felt were more pressing, including later payrolls in a business, when there was not enough money to pay all the bills will not be considered a reasonable cause for failing to give priority to the tax liability.

The penalty for failure to make estimated tax payments is mandatory and cannot, except in very limited circumstances that are rarely present, be waived on claims of reasonable cause. This penalty may be reduced or eliminated if the taxpayer meets one or more of the exceptions provided for by regulations. The penalty is computed using IRS Forms 2210, 2210F or 2220.

The penalty for failure to make deposits of employment taxes is based on when deposits are due and when they are paid. IRS applies deposits to the oldest deposit period, something that does not necessarily reflect the taxpayer’s intent. This can result in an increased penalty because all subsequent deposits are treated as being late. Even if reasonable cause does not exist, it may be possible to dramatically reduce any penalty assessed by a change in how the deposits are allocated.

Interest is due from the due date of the return without regard for extensions of time to file and can be waived only if the IRS has failed in carrying out its ministerial duties. “Ministerial duty” is a routine task that does not involve the exercise of judgment.

A good resource is the Internal Revenue Manual. Go to the IRS website and look at Part 20 of the IRM. In particular, §20.1.1.3 discusses relief from penalties. Reg 301.6724-1 gives great direction on how to make a reasonable cause argument.

The penalty is waived if the failure is due to reasonable cause and not due to willful neglect.

To show "reasonable cause," filer must demonstrate that there were either (a)significant mitigating factors with respect to the failure, or ( that the failure was due to circumstances beyond the filer's control,

AND that the filer acted in a responsible manner both before and after the failure was discovered.

taxbilly