When a taxpayer fails to meet their tax obligations to the Internal Revenue Service (IRS), the IRS will assess one or more penalties for such failure. Though taxpayers often cannot avoid penalties that are properly issued, there are situations in which a penalty can be avoided.
With respect to written advice obtained by a taxpayer from the IRS, IRC 6404(f) requires the IRS to abate any penalty, or any portion of any penalty attributable to incorrect written advice from an officer or employee of the IRS acting in their official capacity. In other words, where a taxpayer has failed to meet a tax obligation, but has done so in reliance upon written advice provided by the IRS, the taxpayer should no longer be responsible for the penalty associated with a taxpayer’s failure to meet her tax obligation. Even if a taxpayer cannot meet the criteria under IRC 6404(f), a taxpayer may still have reasonable cause to request that the tax penalty abate provided the IRS determines that the taxpayer “exercised ordinary business care and prudence” in reliance on written advice from the IRS. Id.
Oral advice is, as an evidentiary matter, more difficult to use as a basis to abate a tax penalty, but the IRS does provide relief to recipients of oral advice from the IRS similar to that afforded to recipients of erroneous written advice when appropriate. Whether the taxpayer exercised ordinary business care, whether there was a clear relationship between the taxpayer’s situation, the advice provided, and the penalty, together with the taxpayer’s tax history and any supporting documentation will also be taken into consideration in the decision to abate a penalty. Supporting documentation includes a notation of the taxpayer’s questions to the IRS, documents regarding IRS advice, information regarding the office from which the advice was obtained, the date of the advice, and the name of the adviser. Also taken into account is whether, despite the erroneous information the IRS had provided the correct information by some other means, such as form instructions or publications.
In short, the assessment of a penalty is not a final decision, and there are mechanisms for abatement of such penalties. However, taxpayers seeking to abate tax penalties must identify the appropriate basis for requesting such abatement, or contact a tax lawyer with experience in federal tax abatement.