Penalty Abatement & Resolution Basics

Publications Apr 10, 2024 Denver, CO

“What’s called a difficult decision is a difficult decision because either way you go, there are penalties.” — Elia Kazan (1909-2003)

One of the most common questions I hear from clients is some version of “Can you remove the penalties from my tax bill?”

While penalty abatement is available, I typically caution clients to first focus on obtaining a formal resolution to the tax debt. Although penalty abatement can be granted if you have a record of clean compliance or if you show reasonable cause, it is not always wise to request relief until you have paid the tax or established a resolution such as in the Installment Agreement. In fact, if neither has been done, the taxing authorities will rarely grant penalty abatement.

When it comes to penalties assessed by the Internal Revenue Service (IRS), the most common are failure to file, failure to pay, federal tax deposit penalty, estimated tax penalty, and the Trust Fund Recovery Penalty (TFRP). To call the TFRP a penalty is a bit of a misnomer since it is the principal tax amount that a business withheld from employees’ paychecks, and then failed to pay over to the IRS. It is a portion of the related business liability, so if a business is paying its liability through an Installment Agreement, those payments are applied to the TFRP as well. But remember that establishing a resolution for the business collection case does not automatically resolve the TFRP case against the individual(s). The individual cases must be addressed and resolved separately. A good representative can resolve both business and personal cases in a coordinated and complimentary way.

The IRS will abate or remove penalties if you can establish reasonable cause. This is generally established when the taxpayer proves that he or she exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations. A showing of reasonable cause typically requires evidence that the taxpayer acted in good faith and that the failure to comply was not due to willful neglect. Absent first-hand knowledge of what led to the tax accrual, a good starting point for a penalty abatement is asking the taxpayer to describe in his or her own words what happened. This should provide enough insight for your tax attorney to further investigate and eventually expound upon key relevant points. It’s always best to focus on the facts and timelines that overlap with the specific tax periods.

If penalties have been assessed against you or your business, you can minimize the damage by remaining current on all tax obligations moving forward, establishing a formal resolution to the back tax liabilities, and formally requesting abatement of all assessed penalties.

For questions or issues regarding tax matters including penalty abatements, or other tax issues, contact [email protected].

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Greenspoon Marder LLP is a full-service law firm with over 225 attorneys and more than 20 office locations across the United States. With operations from Miami to New York and from Denver to Los Angeles, our firm attracts some of the nation’s top talent in key markets and innovation hubs. Our core practice areas include Real Estate, Litigation, and Transactional Services, complemented by the capabilities of a full-service firm. Greenspoon Marder has maintained a spot on The American Lawyer’s Am Law 200 as one of the top law firms in the U.S. since 2015, and our goal is to provide exceptional client service by developing a thorough understanding of each client’s business needs and objectives in order to provide strategic, cost-effective solutions.

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This Greenspoon Marder LLP Client Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.

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