Introduction to IRS Penalty Relief

Businessman Blowing a Whistle and Holding a Red Penalty Card

IRS Penalty Policy

At the IRS overall responsibility for penalties rests with the Servicewide penalties group. The group is responsible for ensuring that IRS employees conduct their affairs with taxpayers in accordance with IRS penalty policy.

The IRS acknowledges that penalties exist to encourage taxpayers to voluntary comply with the Internal Revenue Code and regulations promulgated there under. Voluntary compliance generally requires preparing an accurate return, timely filing it, and paying any tax that is due. When a taxpayer makes a good faith effort to meet their tax obligations they have complied with their requirement and a tax penalty should not be asserted by the IRS.

In order to foster a system where taxpayers voluntarily comply with the rules and regulations, the IRS has set out to “fairly, consistently, and accurately” administer a system of penalties. When an IRS employee incorrectly assesses a penalty against a taxpayer they cause the taxpayer unnecessary harm, confuse the taxpayer, and misrepresent the overall competency of the IRS.

For these reasons, the IRS attempts to consistently administer their penalty policy in a fair and consistent manner. However, IRS employees sometimes assert a penalty against taxpayers in error. Often this error is because the employee, or the automated system, is unaware of the underlying circumstances that should lead to the non-assertion of an IRS penalty.

Relief from IRS Penalties

In general, the IRS will abate or not-assert a penalty if it falls into one of three categories. These categories are (1) reasonable cause (2) administrative waivers, and (3) correction of service errors. If a taxpayer files a formal protest regarding an IRS penalty (administrative appeal), the appeals division may also abate the tax penalty while taking into account the hazards of litigation.

Managerial Approval

IRC §6751(b) requires that all IRS penalties that are not assessed through electronic means receive written approval by the immediate supervisor, or manager, of the employee who made the initial determination to assert a tax penalty.

An IRS penalty is assessed through electronic means when the penalty is imposed “free of any independent determination by an IRS employee as to whether the penalty should be imposed" or not. In general, an IRS penalty may get automatically assessed if the penalty is imposed for failure to file or pay tax, failure to pay estimated taxes, failure to deposit tax, or the accuracy related penalty under the automated underreporter program.

If a taxpayer provides a response to the accuracy related penalty under the automated underreporter program then an IRS employee must make a determination of the legitimacy of the tax penalty. If at that time the IRS continues to assert the penalty, then managerial approval is required.

Requesting IRS Penalty Relief

A taxpayer may request IRS penalty relief either during or after an examination, or after an assessment and notification is issued to the taxpayer. In general, it is the taxpayer's burden to prove entitlement to penalty relief.

Appealing IRS Penalty Determinations

Taxpayers have the right to challenge the assertion or assessment of an IRS penalty. Taxpayers may request a review before the tax penalty is assessed, after it s assessed but before it is paid, or after the penalty is paid. If an agreement cannot be reached with the field office or service center, the taxpayer may request a conference with the employee’s immediate manager, or may request in writing that the case is forwarded to the appeals office.

The IRS Appeals Office

The appeals office is an independent administrative body within the IRS. The Appeals office will only review a tax penalty determination if a request for IRS penalty relief has been denied and the taxpayer requests an appeal. Before appeals reviews the case for issues like reasonable cause, appeals normally first considers issues of basic liability for the penalty. Appeals also has the additional authority to settle IRS penalties for less than the full amount based on the hazards of litigation.

Preassessment Penalty Appeals

Generally, the Appeals Office will only consider the appropriateness of the following penalties prior to their assessment:

(1) Penalties asserted by an IRS employee in the course of an examination

(2) Penalties that are specifically granted pre-assessment appeal rights such as the trust fund recovery penalty.

(3) The intentional disregard penalty when it is asserted for failure to comply with cash reporting requirements.

If Appeals considers an IRS penalty before it is assessed, it will generally not reconsider the penalty at a later juncture.

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Disclaimer: Teogathalaw Law does not guarantee the accuracy of the material contained on this website, or webpage. None of the material presented on this website concerning tax matters may be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the taxing authorities.

Page last revised : November 14, 2011