Sample Penalty Abatement Letter

VIA REGISTERED MAIL

April 30, 2014
Internal Revenue Service
550 Main Street
Cincinnati, OH 45999-0039

   Re: TAXPAYER’S NAME
   SSN: 999-99-9999
   Tax Form: 1040
   Tax Period: 12/31/2012


To Whom it May Concern:

Please be advised that XYZ represents the above referenced taxpayer, [taxpayer’s name] (hereinafter referred to as “Taxpayer”). We are writing to request that her penalty for filing a return after the due date and paying late together with interest are abated for her 2012 tax year. A discussion of the underlying facts, supportive law and analysis, and the basis for our conclusion appears below.

FACTS

The Taxpayer is a New York resident that in 2012 filed with the status married filing joint. In 2012 her marriage was experiencing severe turbulence and was causing the Taxpayer extreme emotional distress. The Taxpayer was also diagnosed with skin cancer in 2012 and felt that her life was in jeopardy and required surgery to save her life.

The Taxpayer is well aware of her filing and payment obligations with the IRS and besides in 2012, has maintained a diligent record of compliance with all Internal Revenue laws and procedures. A review of the Taxpayer’s past filing and payment history will surely attest to the fact that she clearly understands her obligations to timely file and pay taxes. The Taxpayer’s record of compliance highlights her conviction to accurately report and pay all her taxes.

Despite her personal issues, the Taxpayer still exercised ordinary business care and prudence in dealing with her taxing obligations by timely retaining a reputable tax preparation company to prepare her 2012 tax return.

In March of 2013, before her tax return was due, the Taxpayer signed a contract with ABC Company, a major tax preparation company, to assist in preparing her 2012 tax return. The Taxpayer signed a contract and paid paid ABC Company to prepare her return.

The representative she retained at the major tax preparation company fell ill and was hospitalized, which caused confusion at ABC Company that resulted in the failure to file and prepare the Taxpayer’s 2012 tax return. The Taxpayer was distracted by her turbulent marriage and illness at the time that her tax 2012 tax return was due and she therefore failed to notice that the major tax preparation company did not prepare her 2012 tax return until she began preparing her 2013 tax return.

As soon as the Taxpayer realized that her 2012 tax return had not been filed, she immediately sprang into action and contacted ABC Company who investigated the matter and reported the above mentioned problem. The Taxpayer promptly retained a new accountant to prepare and file her 2012 taxes. Her 2012 tax return was filed with the IRS on April 3, 2014, nearly a year past the due date of April 15, 2013.

LAW

I. Reasonable Cause

Penalties assessed for failure to pay taxes can be excused upon a showing of “reasonable cause and lack of willful neglect.” See IRC 6651(a)(2) and Treas. Reg. 301.6651-1(c). A failure to file a return or pay tax due within the time prescribed will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that they exercised ordinary business care and prudence. Reg. 301.6651-1(c)(1). The court in Orient Investment and Finance Co. v. Commissioner, 36 AFTR 818, 166 F.2d 601 (1948) stated that “reasonable cause means nothing more than the exercise of ordinary business care and prudence.”

Further, the Internal Revenue Manual states that “[p]enalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.” See Internal Revenue Manual section 20.1.1.2.1(7)

The penalties imposed under IRC 6651(a)(1) & (2) do not apply if the Taxpayer can show they acted with reasonable cause and not willful neglect. See IRC §6651(a). A taxpayer demonstrates that reasonable cause exists to abate penalties when they can show they exercised ordinary care and business prudence in figuring-out their taxing obligations, but nevertheless circumstances resulted in them being unable to comply with those obligations. See Internal Revenue Manual section 20.1.1.3.2

Ordinary business care and prudence is established when a taxpayer makes provisions for their tax obligations based upon reasonably foreseeable events. The Taxpayer can demonstrate they acted with ordinary business care and prudence if they can show legitimate reasons for any non-compliance. See Internal Revenue Manual section 20.1.1.3.2(3)(A).

To show ordinary business care and prudence a taxpayer should provide an explanation that corresponds with the dates of non-compliance. A taxpayer can also demonstrate ordinary business care and prudence by demonstrating that they have a history of compliance with the tax laws. Lastly, if a taxpayer can show that circumstances were beyond their control and they could not have reasonably anticipated an event that led to non-compliance, they have demonstrated that they acted with ordinary business care and prudence. See Internal Revenue Manual section 20.1.1.3.2.2(2).

ANALYSIS

In the instant case, the Taxpayer demonstrated that she exercised reasonable care and prudence and was not willful or negligent in failing to full comply with her taxing obligations. The Taxpayer showed that she was not in her normal state of mind as she was experiencing turbulence in her marriage and that she was not in her normal state of body as she was going through cancer treatment. In addition, the Taxpayer demonstrated a degree of diligence by hiring a tax preparation company.

The Taxpayer has shown that she meets the standard of acting with ordinary business care and prudence in complying with her taxing obligations, but circumstances beyond her control resulted in her being unable to comply with the tax code.

A major tax preparation company was retained prior to the due date for filing her 2012 tax return with the IRS. The Taxpayer was without fault as she did not expect that the representative at ABC Company would fall sick and be hospitalized and that the major tax preparation company would not have provided her with a replacement tax professional. The Taxpayer reasonably expected that if anything happened to her representative, she would be contacted by the major accounting firm to ensure that her taxing obligations were fulfilled.

The Taxpayer has also demonstrated that she acted with ordinary business care and prudence as her history of compliance attests to her diligence in ensuring that she complies with the taxing statutes.

The Taxpayer could not reasonably have foreseen that the representative she hired would fall ill and be hospitalized and that the major tax preparation company would not contact her. Further the Taxpayer's own poor mental state due to her marriage ending and her poor physical condition due to her need for cancer treatment demonstrates that under the circumstances, the Taxpayer acted with reasonable care.

In addition, immediately upon the Taxpayer’s discovery of her non-compliance she sprang into action and began taking the necessary steps to rectify the late filing by retaining a new accounting firm to prepare and file her 2012 tax return. The Taxpayer made every reasonable effort to diligently rectify the problem as soon as she discovered that it existed.

CONCLUSION

The Taxpayer clearly had no intention of disobeying the taxing statutes. The error occurred because the Taxpayer was not in her normal emotional state, she was physically ill, and had relied on one of the nation’s largest and most reputable tax preparation companies. It is our contention that requiring the Taxpayer to pay penalties and interest on those penalties would not support voluntary compliance by taxpayers, as there was clearly no willful intent to disobey the taxing statutes.

Based on the extenuating facts and circumstances presented above, the Taxpayer respectfully requests abatement of all penalties and interest associated with her late filing and paying taxes due to her 2012 tax year.


Please also see our pages on how to write a penalty abatement letter and our annotated sample penalty abatement letter.