IRS Makes Changes To Its First-Time Abate Penalty Waiver

This is an update to my previous article: IRS First-Time Abate Penalty Waiver and the Report from the Treasury Inspector General for Tax Administration, published on October 26, 2012. 

The IRS has updated its First Time Abate program for penalty relief. This program allows taxpayers a one-time waiver the first time a failure to file, failure to pay or failure to deposit penalty is charged. The waiver is available for only one tax period. 

According to the update, in order to qualify for relief the taxpayer must have 

1. Filed all tax returns
2. Paid or arranged to pay all tax currently due (for example, the taxpayer has set up an installment agreement and is current with his or her payments). 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

IRS to Pursue "Quiet" Disclosure of Foreign Income

US taxpayers have different reasons for not disclosing their foreign bank accounts (by filing FBARs). While some taxpayers are intentionally hiding foreign income to avoid paying US taxes, many just don't know that they are required to disclose their account and pay taxes on the interest income. Some of these individuals are foreign born US citizens maintaining a bank account in their country of origin. Others are US citizen living overseas. Uninformed or not, during the last few years the US government has made it a priority to crack down on offshore tax evasion. 

As part of this effort, the US enacted the Foreign Account Tax Compliance Act which requires foreign financial institutes to report to the IRS information about financial accounts held by U.S. taxpayers. As a result of this enactment, the risk of an audit for individuals with foreign bank accounts increased substantially. 

In 2009, the IRS introduced its first Offshore Voluntary Disclosure Program (OVDP) to encourage individuals to voluntarily disclose their foreign bank accounts. As part of the deal offered by the program, the IRS agreed not to audit or criminally prosecute these individuals in exchange for the payment of taxes, penalties and interest on any undisclosed income and a one time 20% penalty on the highest balance in the foreign bank account (lower penalties are available if special circumstances are met). Due to the success of the first OVDP, the IRS reintroduced the OVDP in 2010 with a 25% highest balance penalty and in 2011 with a 27.5% penalty. 

As the penalties under the OVDP increase each year, more taxpayers are opting to instead come clean through a "quiet" disclosure. A "quiet" disclosure" means that taxpayers amend their past tax returns and FBARS without actually coming forward under the OVDP and paying the penalty on the highest balance. As a result, the government misses out on billions of dollars in revenue. 

This month, the Government Accountability Office (GAO), the "congressional watchdog," issued a report urging the IRS to pursue those taxpayers making "quiet" disclosures. The report, titled Offshore Tax Evasion. IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, found that as of December 2012, the OVDP programs have resulted in over 39,000 disclosure and over $5.5 billion in revenue. Furthermore,while the IRS has also detected some taxpayers trying to avoid paying taxes, interest and penalties, many attempts have been missed. The GAO found many more potential "quiet" disclosures than the IRS detected by analyzing amended returns from 2003-2008 and matching them to available information about taxpayer offshore activities. The GAO concluded that the act of "amending past returns or reporting on current returns previously unreported offshore accounts, results in lost revenue and undermines the programs' effectiveness." 

The GAO recommended that in addition to identifying and educating taxpayers about their reporting requirements, the IRS should "explore options for employing a methodology to more effectively detect and pursue 'quiet' disclosures." The IRS has agreed to adopt these recommendations.  

Currently, in the OVDP question and answer section, the IRS urges taxpayers who have already made a "quiet" disclosure to take advantage of the penalty framework provided by the OVDP. The IRS warns that those taxpayers making a "quiet" disclosure should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years (question #15). 

Although it is uncertain what methodology the IRS will adopt to ferret out "quiet" disclosures, it is likely that the risks may no longer be worth taking. 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

IRS First-Time Abate Penalty Waiver and the Report from the Treasury Inspector General for Tax Administration

Update: IRS Makes Changes To Its First-Time Abate Penalty Waiver (6/17/13)

Have you heard of the IRS's First-Time Abate penalty waiver program (FTA)? If you haven’t you’re not alone.  Few taxpayers and tax professionals were aware of this program until a report from the Treasury Inspector General for Tax Administration (“TIGTA”) came out on October 17, 2012 auditing it.  This is because this program is not publicized by the IRS.  The only IRS overview of the program is in its Internal Revenue Manual (“IRM”) guidelines (20.1.1.3.6.1), which is a manual for IRS employees.  In its report, TIGTA points out that there is no mention of the FTA in the 1040 instructions, on the IRS’s website, “Eight Facts on Penalties,” or on balance due notices sent to taxpayers. 

The FTA is an administrative waiver which began for the 2001 tax year.  Ordinarily, taxpayers must show reasonable cause, a statutory exception or IRS error before the IRS will abate penalties.  A showing of reasonable cause requires an explanation that the taxpayer exercised ordinary business care and prudence in determining his tax obligation but nevertheless failed to comply with his obligation due to some specific circumstances.  Instead, the purpose of the FTA is to reward past tax compliance and promote future tax compliance.  Therefore, no showing of reasonable cause is required before relief is granted. 

As part of this program, the IRS will waive failure to timely file and timely pay penalties for a specific tax year as long as the taxpayer has demonstrated full compliance over the prior three years.  This relief is not automatically granted since in order to obtain the FTA waiver, the taxpayer must request it. 

TIGTA’s report analyzes the FTA program and provides several recommendations for improvement.  The IRS is currently in agreement with many aspects of these recommendations and is working to implement them.  If these recommendations are incorporated, the FTA will undergo substantial changes.

• TIGTA Recommends That The FTA Waiver Be Better Used to Promote Tax Compliance

Currently, in order to obtain an FTA waiver, taxpayers are not required to demonstrate full compliance by paying their current tax liability.  This feature of the program was criticized by TIGTA’s report and will likely be modified by the IRS.  TIGTA argues that allowing taxpayers relief before the liability is paid in full goes against the purpose of FTA.  Instead, FTA relief should be contingent upon the payment of the liability.

• TIGTA Recommends That The IRS Develop A Process To Address The Negative Impact To Taxpayers Who Qualify for Both FTA And Reasonable Cause Relief.

Current IRS procedures provide that when taxpayers qualify for both an FTA waiver and penalty relief based on reasonable cause, they are to be granted FTA waivers.  The reason for this policy is that it simplifies the abatement process, thereby conserving IRS resources.  TIGTA’s report determined that this process hurts certain taxpayers because they will be prevented from receiving FTA waivers in the future and the portion of their penalties abated may be reduced.  

For example, according to TIGTA's report, If a taxpayer’s penalties are abated due to reasonable cause in 2010, he may qualify for an FTA waiver for 2011.  Instead, when the taxpayer is granted an FTA waiver despite his reasonable cause in 2010, he is precluded from using the waiver in 2011.  If he has no reasonable cause excuse in 2011, he is left with no recourse. 

Furthermore, according to TIGTA's report, under the FTA waiver, abatement of the failure to timely pay penalty includes the assessed amount of the penalty but not the accrued amounts.  An abatement of the failure to timely pay penalty due to reasonable cause includes both the assessed and the accrued amounts.  The failure to timely pay penalty can reach 25% of the unpaid tax liability if it is left to accrue indefinitely.  Furthermore, while the penalty continues to accrue, it is only assessed periodically and most of the penalty is never officially assessed until there are funds in the taxpayer’s account to pay all or part of the penalty.  Therefore, a taxpayer seeking to abate the accrued amount of the penalty after an FTA waiver will have to submit an abatement request based on reasonable cause.  

As evident from TIGTA's report, the FTA has a lot of room for improvement.  Nevertheless, it's an important program of which taxpayers and their representatives must be made aware.  Over a million taxpayers are missing out every year on obtaining relief from penalties which they do not have to pay.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

What Should You Know If Your Case Has Been Assigned To An IRS Revenue Officer

Who Is An IRS Revenue Officer 

An IRS revenue officer ("RO") is a highly trained employee of the IRS collection division.  ROs are granted total collection authority by the IRS and are therefore able to make phone calls and visit you at home or at your place of business.  If you are not at home or work when the RO comes to visit, he or she will leave a request that you contact them by a specific date.  This request should not be ignored.  If you do not voluntarily comply with this request, the RO has the power to summons you to a mandatory meeting.  The RO also has the power to garnish wages and bank accounts, seize accounts receivables and seize property.  It is very common for an RO to use these collections techniques against an uncooperative taxpayer.

Every RO is different.  I have personally worked with many ROs who care deeply about a taxpayer's situation and do everything in their power to find the best solution possible.  I have also worked with unreasonable ROs who don't have patience for excuses and are quick to garnish wages and seize bank accounts.

The bottom line is that ROs are people with a very difficult and dangerous job. Although they do not carry weapons or make arrests, they do work long hours and make face-to-face contact with many unreasonable and desperate people.  It is not uncommon for an RO to be threatened on the job.  Dealing with a reasonable and responsive taxpayer is often a welcome opportunity for an RO.

Why Is An RO Assigned To Your Case?

If you owe the IRS money, the IRS may assign your case to an RO for a number of reasons.  These include: (1) you owe a large debt (2)  you owe payroll taxes (3) you have unfiled tax returns and/or (4) the regular IRS collection division has been unsuccessful in collecting from you.

What Should You Do?

If you receive a call or visit from an RO, do not ignore the RO.  Whether or not you should hire a tax controversy attorney to represent you depends on how comfortable you are dealing with the RO and the complexity of your tax situation.  If you decide to handle communications with the RO on your own, consider the following:

1. You should obtain a complete snapshot of your account with the IRS.  In order to do this, contact the IRS in order to gather the following information:
• Confirm that all necessary tax returns have been filed 
• If any tax returns have not been filed, these need to be prepared and filed immediately.  In order to get these prepared, request that the IRS send you your Wage and Income Transcripts for the tax years that have not been filed.  Wage and Income Transcripts show your W2s, 1099s, mortgage interest information, etc.  
• Request that the IRS send you an Account Transcript for each year that you have a balance.  This transcript will show you each year's balance due and the interest and penalties that have been added on.  
2. Keep in contact with the RO and comply with his or her requests.  As mentioned above, ROs have complete collection authority and will use it against you if you are unresponsive. 
3. The RO will want to resolve your account by reviewing your finances in order to determine whether you can (1) pay your balance in full, (2) pay on an installment agreement or (3) cannot pay at all. If you need more time than the RO initially allows to gather your financial information, request an extension.  Do not ignore deadlines.  
4. The documentation and information that the RO will request varies depending on your specific circumstances.  If you feel that the RO's request is burdensome or unreasonable, it may be best to contact a tax controversy attorney.
5. The RO has the power to abate delinquency penalties.  Therefore, if you have a good reason for failing to file your returns on time or failing to pay your liability in full, bring the issue up with the RO.

Finally, understand that ROs are often out of the office (making personal contact with other taxpayers) or are in training.  Therefore, it is common that an RO will take his or her time responding to your or your attorney's calls.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Recent Development in Foreign Bank Account Reporting

On June 26, 2012, the IRS released information about a new procedure (scheduled to go into effect on September 1, 2012) which will allow some non-resident U.S. citizens to resolve tax issues relating to their foreign bank accounts.  This will affect non-resident U.S. citizens who are behind on filing their U.S. income tax returns and/or disclosing their foreign bank accounts.  

All U.S. citizens, even those who reside abroad, are taxed on their worldwide income.  U.S. citizens with foreign bank accounts are also required to file Reports of Foreign Bank and Financial Accounts (FBARs) if the aggregate value of the accounts exceeds $10,000 at any time during the year.  

If these non-resident U.S. citizens qualify as low compliance risks, they have the option to come into compliance with their filing requirements without having to participate in the Offshore Voluntary Disclosure Program (“OVDP”). The OVDP allows US citizens to voluntarily come forward and report their foreign bank accounts. In order to participate in the OVDP, the U.S. Citizen is required to pay significant penalties calculated on the amount of tax owed and the value of the foreign bank account(s). In exchange, the government promises not to impose fraud penalties and to forgo criminal prosecution.

Under the new procedure, if the IRS determines that the taxpayer presents a low level of compliance risk, the IRS will expedite review of the taxpayer’s submission, will not assert penalties and will not pursue follow-up actions. The downside to this procedure is that the IRS could also determine that a taxpayer’s submission presents a higher compliance risk and is therefore not eligible for the procedure. If this is the case, the IRS will conduct a thorough review of the taxpayer’s information and possibly even a full examination. The taxpayer must make the determination of whether or not he is a low compliance risk taxpayer before he submits the required documents. If the taxpayer’s determination is incorrect, the taxpayer will be treated as if he opted out of the OVDP and chose to quietly disclose his account. This could subject him to substantial penalties and possible criminal prosecution.

In making its determination regarding the level of compliance risk, the IRS will consider the simplicity of the return and the amount of tax due. A taxpayer with simple tax returns and less than $1,500 in tax due in each of the years will most likely be considered a low compliance risk submission. If, on the other hand, the IRS determines that high risk factors are present, the submission may not qualify for the procedure. These risk factors that the IRS considers include, but are not limited to, the income and assets of the taxpayer, any indication of sophisticated tax planning or avoidance, material economic activity in the United States, the amount and source of United States source income and any history of noncompliance with US law. The IRS has stated that additional information regarding these specific factors will be released before this procedure goes into effect.

In order to take advantage of this procedure, the taxpayer must (1) file delinquent tax returns with appropriate related information returns for the past three years (2) file delinquent FBARs for the past six years, (3) provide any additional information regarding compliance risk factors which may be required by future instructions and (4) pay any federal tax and interest due.

Overall, this procedure will provide a welcome alternative to the OVDP to non-resident U.S. citizens who clearly fall into the low compliance risk category. Prior to the announcement of this procedure, these low risk non-residents could either participate in the OVDP and pay substantial penalties or participate in the risky quiet disclosure by filing their delinquent returns and FBARs.  

On the other hand, those taxpayers who are concerned about criminal prosecution should instead take advantage of the OVDP. Unlike the OVDP, this new procedure does not guarantee protection against criminal prosecution. It is important to note that once the taxpayer makes a submission under this new procedure, he can no longer participate in the OVDP. If a taxpayer is ineligible for the OVDP, he would also be ineligible for this procedure.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

S.B. 459: California's Attack on the Independent Contractor Classification

It is not uncommon for business owners to avoid paying taxes and employee benefits (i.e. overtime pay) by hiring independent contractors instead of employees. These business owners are already at risk of an audit by the Employment Development Department and the IRS.  If the audit ends up in a reclassification, the business owner will be responsible for unpaid taxes, possible penalties and interests.  

Now, as a result of new California legislation, this practice of misclassifying workers can end up costing business owners and their advisers everything.    

• S.B. 459

As of January 1, 2012, the California Legislature enacted a harsh new law targeting the misclassification of workers as independent contractors by California business owners. Under S.B. 459, a business owner can be found to have engaged in the following unlawful activities:

1. The "willful misclassification" of an individual as an independent contractor and/or
2. Charging a willfully misclassified worker a fee, or making any deductions from compensation for any purpose that would have violated the law governing deductions from pay (Labor Code sections 221 and 224) had the worker properly been classified as an employee.  

Additionally, non-lawyer consultants are subject to joint liability for knowingly advising a business owner to classify a worker later determined to be an employee.

• Penalties

This laws allows California's Labor Commissioner or a court to levy a civil penalty of $5,000 to $15,000 for each violation found "willful." If it is also determined that the business owner engaged in a pattern or practice of "willful misclassifications" a civil penalty of $10,000 to $25,000 may be imposed. 

Additionally, this law also empowers the Labor Commissioner to assess additional damages of behalf of those misclassified (the workers themselves). As a result, if a business owner misclassifies a large group of workers as independent contractors, the business owner may be subject to a class action law suit by this group.  

• "Willful"

The key word here is "willful". "Willful misclassification" is defined as "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." Although this standard appears to be more stringent than the "voluntary and intentional" standard proposed in earlier versions of the law, it is still problematic because courts have defined "knowing" to included constructive knowledge. As a result, if it is found that the business owner should have known that the worker should have been classified as an employee, the misclassification will be found willful.  This is a very vague and subjective standard that will cause a lot of uncertainty and is unlikely to protect business owners who are simply mistaken about the proper classification.  

• Notice

In addition to the penalties, the law also requires the business owner to post a notice (either on its website or place of business accessible to all employees and the general public) at each location where a violation occurred.  This notice must contain the specific information about the violation, be signed by an officer and be posted for one year.  

In sum, this new law imposes potentially crippling and humiliating penalties upon California business owners who improperly classify their workers. Since the standards for determining whether a worker is an independent contractor or an employee are also often subjective, this law will likely excessively burden California business owners.  If the goal of the California legislature is to inflict fear in California business owners and thereby do away with most independent contractors, the new law will most likely succeed.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.  

What You Should Know If You Have A Foreign Bank Account

Currently, the IRS considers international tax enforcement its top priority. Therefore, if you have a foreign bank account, it is extremely important to be aware of your reporting requirements or else be subject to substantial penalties and criminal prosecution.

• The 2012 Offshore Voluntary Disclosure Program ("OVDP") 

On January 9, 2012, the IRS announced its third OVDP.  The purpose of this program is to help people with undisclosed income from foreign accounts become current with their US tax obligations.  The IRS has not yet released additional guidance to assist taxpayers in participating in this program and there is no deadline to participate (currently the guidance in existence is from the 2011 OVDP). 

Only those taxpayer who are not currently under civil or criminal investigation by the IRS may participate in this program. 

For those who choose to participate in this program by making a voluntary disclosure, the IRS promises that significant civil penalties and criminal prosecution will not be imposed.  In order to participate:

1. The taxpayer must file FBARS (see below) and amended income tax returns for the last eight years
2. The taxpayer must pay all income tax owed to the U.S.  plus a 20% accuracy-related penalty and interest for the eight years of returns 
3. The taxpayer must pay 27.5% of the highest aggregate balance in the undeclared foreign account during the past eight years.  There are exceptions to this rule.  

• FBARS

U.S. persons must disclose their financial interests in, signature authority over or other authority over, foreign bank, security or financial accounts if the aggregate value of each account(s) exceeds $10,000 at any time during the year.  This requires the filing of a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR").  The FBAR is an information return which is filed separately from the taxpayer's income tax return.  The deadline to file an FBAR is June 30th. 

If the IRS determines that a taxpayer's failure to file this form is willful, the IRS can impose substantial civil and criminal penalties.  If the violation is not willful, the penalty shall not exceed $10,000 per violation.  If the failure to file is due to reasonable cause and the account was properly reported, no penalty should be imposed.  

For each willful violation, the IRS shall impose a penalty which is the greater of $100,000 or 50% of the value of the account at the time of the violation (the time of the violation occurs on the due date for filing the FBAR).  A willful violation also subjects the taxpayer to five years in prison and/or a maximum fine of $250,000.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.  

The IRS "Fresh Start" Initiative: Expanded to Help Struggling Taxpayers

Since 2008, the IRS has been adjusting its collections practices to help struggling taxpayers during this difficult financial climate.  

Part of these efforts is the "Fresh Start" initiative, announced on February 24, 2011.  The changes included in this initiative are: (1) Adjustments to Lien Polices (2) Easier Access to Installment Agreements for Struggling Small Businesses and (3) Expanding the Streamlined OIC Program.

Last week, the IRS announced a major expansion of this "Fresh Start" initiative.  As part of this expansion, the IRS is taking steps to provide new penalty relief to the unemployed and allowing even more taxpayers to qualify for an installment agreements.

Adjustments to IRS Lien Polices

Under the Fresh Start Initiative, the IRS will no longer file a lien if the tax owed is under $10,000 (unless special circumstances warrant otherwise).  

After a lien has been released because the tax liability has been satisfied, a taxpayer may request a withdrawal in writing by submitting form 12277. 

Furthermore, a taxpayer who owes $25,000 or less will be eligible for a lien withdrawal if he or she sets up an installment agreement through direct debit and makes three consecutive direct debit payments.  

Installment Agreements for Businesses

Small business that owe $25,000 or less in payroll tax, can set up an installment agreement without submitting a financial statement if the installment agreement allows for the debt to be paid within 24-months and the installment agreement is set up through direct debit.

Offer in Compromise

The streamlined OIC program is available to wage earners, the unemployed and self-employed taxpayers with no employees and gross receipts under $500,000.  A taxpayer is eligible for this program if his or her total household income is $100,000 or less and the amount owed to the IRS is less than $50,000.  If the taxpayer qualifies for this program, fewer requests will  be made for additional financial information and there will be greater flexibility in calculating a taxpayer's reasonable collection potential.  

Following the initial expansion of the streamlined OIC Program in 2011, the IRS has been working to put in place additional common-sense changes to the program to reflect real-world situations. 

  

Relief From Penalties 

The IRS plans to allow a six-month grace period on failure-to-pay penalties for certain wage earners and self-employed individuals.  In order to qualify, the taxpayer must fit into one of the following categories:

• Wage earners who have been unemployed for at least 30 consecutive days during 2011 or in 2012 (from January 1-April 17 2012).  
• Self-employed taxpayers who experience at least a 25% reduction in business income in 2011 as a result of the economy.  

Furthermore, the taxpayer's income must be equal to or less than $200,000, if filing married filing joint, or $100,000, if filing single or head of household.  The taxpayer's balanced owed for 2011 must also not exceed $50,000.  If these eligibility requirements are met, taxpayers need to complete Form 1127A in order to request relief.  

If the tax, interest and other penalties are fully paid by October 15, 2012, a request for an extension of time to pay will shield the taxpayers from the failure to pay penalty for 2011.  

Interest, which is currently 3% per year, is not affected by this grace period and will continue to accrue on unpaid back taxes.  

Installment Agreements

The IRS has also expanded the streamlined installment agreement process to allow individual taxpayers who owe $50,000 or less to request an installment agreement without having to submit a financial statement.  The maximum term for payment has also been raised to 72 months.  In order to qualify for for this expanded streamlined installment agreement, taxpayers must agree to pay through direct debit.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

Understanding IRS Penalties and Penalty Abatement Requests

FAILURE TO FILE AND FAILURE TO PAY PENALTIES

When you own money to the IRS, there are two common penalties that the IRS can tack on to your liability in addition to interest.  If your tax return is filed late, the IRS will impose the "Penalty for Filing Tax Return After the Due Date (failure to file)" which is up to 25% of the net tax due.  This penalty is imposed at a rate of 5% per month, for every month that your tax return is not filed, subject to the 25% ceiling (reaching its maximum at 5 months)

The second penalty is the "Penalty for Late Payment of Tax (failure to pay)." This penalty is imposed at a rate of 0.5% per month, subject to the 25% ceiling (reaching its maximum at 50 months).  When both penalties are imposed together, the 5% failure to file penalty will be offset by the 0.5% failure to pay penalty.  This means that if you fail to file a tax return and pay the tax due on time, you will be subject to a maximum penalty of 47.5% of the net tax due (this is assuming that the failure to file and pay is not fraudulent).  These are very hefty penalties and it's best to try to avoid them if possible. 

This year, you have until April 17, 2012 to file your taxes (individual).  In the alternative, if you cannot file your taxes by April 17, you can submit to the IRS the "Application for Automatic Extension of Time To File U.S. Individual Income Tax Return".  By filing this form, you will get an additional six months to file your tax return, thereby avoiding the late filing penalty if the return is filed by October 17, 2012.  Nevertheless, this form does not extend the time to pay any taxes owed.  All taxes owed must be paid by the April 17, 2012 deadline or else the IRS will assess the late payment penalty.  

If, on the other hand, you can show that undue hardship will be suffered if payment is made on the payment due date, the IRS may grant an extension to pay.  In order to apply for this extension,  you should submit "Application for Extension of Time for Payment of Tax Due to Undue Hardship."

PENALTY ABATEMENT

If you can show reasonable cause for failing to pay and file on time, the IRS may waive the failure to file and pay penalties. In order to request abatement, you should send a letter to the IRS (either with a delinquent individual tax return or after penalties have already been assessed) describing the penalties involved and providing an explanation for why reasonable cause exists.  In the Internal Revenue Manual (IRM), the IRS states that "reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligation but nevertheless failed to comply with those obligations." 

The IRS also lists several defenses that may satisfy the reasonable cause standard.  These include 

• Death or serious illness of the taxpayer or a member of his immediate family 
• Fire, casualty, natural disaster or other disturbance and
• The taxpayer's inability to obtain records through no fault of his own.  

Even if your specific situation does not fall into one of these three categories of defenses, you should still submit a request for abatement.  

That is not to say that getting the IRS to grant your penalty abatement request will be easy.  

• First, it could take three month to a year before your penalties are abated (while this request is pending, you must either pay your liability in full or you must be making payments through an installment agreement).  
• Second, in order to get the late payment penalty abated, you need to, at least, pay the amount of tax owed (excluding interest and penalties) in full. 
• Third, it is best to submit as much proof supporting your reasonable cause defense as possible.  For example, if you are claiming illness (either your own or in your immediate family), you should submit a doctor's note supporting the illness.  

Finally, many penalties abatement letters get rejected and must be appealed before they are accepted.  At the initial stage, your defenses will be inputted into a computer program and, unless the issues are extremely clear cut and well supported per IRS standards, it is likely that you will receive a computer generated rejection letter.  Appealing the rejection is highly recommended because the IRS representative reviewing the appeal has substantially more discretion and leeway to abate the penalties.  Remember, the penalty abatement process is not a simple one but it is worth fighting for considering that you may be assessed penalties up to 47.5% of the net tax due.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

The IRS Reopens the Offshore Voluntary Disclosure Program for 2012

The IRS has recently announced that it will reopen its Offshore Voluntary Disclosure Program (OVDP) for the third time.  The purpose of this program is to allow people hiding offshore accounts to come clean to the IRS and get current with their taxes. 

The previous two programs resulted in collection of more than $4.4 billion in 2009 and 2011.  The IRS states that it has closed about 95% of the disclosure cases from the 2009 program, collecting $3.4 billion.  The 2011 program has resulted in an additional $1 billion as the IRS continues to process those disclosure cases. Therefore, for those of you who participated in the 2011 OVDP and have not yet heard from the IRS, sit tight. It will probably take another three years before the IRS gets through everyone who participated.  

Since the 2011 program expired in September, hundreds of taxpayers continued to make voluntary disclosures.  In response, the IRS has decided to treat these taxpayers under the provisions of the 2012 OVDP.

Unlike the previous two programs, the 2012 OVDP has no set deadline to expire.  Nevertheless, in return the IRS reserves the right to change the program at any time by increasing penalties or ending it altogether.   

Currently the penalty structure for the 2012 OVDP remains the same except for the taxpayers in the highest penalty category.  Those individuals will have to pay a penalty of 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight tax years prior to disclosure.  This is an increase from the 25% penalty during the 2011 OVDP.  In limited situations and for smaller accounts, some taxpayers will instead be eligible for the 5% or 12.5% penalties (as they were during the 2011 OVDP).   If the taxpayer believes that the penalty is disproportionate, they may opt to be examined by the IRS. 

In order to qualify for the program, taxpayers must file all their original and amended tax returns and include payment for taxes owed, interest, accuracy-related and/or delinquency penalties for up to eight years. 

IRS Commissioner, Doug Shulman, urges people to come clean before the IRS finds them.  He states that “we are following more leads and the risk for people who do not come in continues to increase.” 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.