There are a lot of different types of penalties IRS can assess. Let’s start with the failure to file.
Typically, it’s a firm deadline and when you have to file a return. If you don’t file an extension and your return is late, or you do file the extension and your return is late, you’ll get a notice from the IRS that you have a late return. Even if you have a good excuse you will have to substantiate it with documents and evidence of reasonable cause.
Some examples of excuses that don’t work on the IRS:
Saying your CPA promised to file the return on time and they missed the deadline. Simply indicating to the IRS that you had a CPA that missed a deadline is not enough, because IRS feels that it is your responsibility, not the CPA’s to know when to file the return.
If it’s something more of a technical nature and you file the return with an error on it, and it’s really more of a legal question or super technical tax question, if you get a penalty for that for misreporting something, you might be able to argue reasonable cause because you relied upon a tax professional.
Get a letter from your CPA, tax attorney, or whoever gave you the advice in question, and IRS will then consider that and potentially, abate the penalty.
What does it mean to abate a penalty?
Removing the penalty in the terminology of the IRS is abating the penalty. When requesting penalty relief, that is what you want to ask for, “penalty abatement”.
Missing a filing deadline is very difficult. We had a client for whom we were able to get an abatement fro for a missed deadline, but you really have to show that even though you took all reasonable measures and acted like a prudent person, you still couldn’t meet the deadline.
There have been cases of people that have been incarcerated, out of the country, and a number of other excuses that do not qualify. Because you can always file a tax return with the US Embassy in a foreign country.
Carefully consider what the facts are and respond to the notice even if you don’t have a good reason for your missed deadline.
Always be truthful, gather your evidence, provide your documents. Third-party records are better if somebody can substantiate,your evidence with a declaration or a note from that person.
Be sure to respond within the correct timeframe. In the notice, it’ll indicate how much time you have to respond. It’s typically 30 days, but it could be as short as 15 days or even less. Different penalty notices have different deadlines. Make sure you don’t miss that deadline on top of the missed deadline for which you have been assessed a penalty.
Asking for more time from IRS
If you got the letter or notice late, or you just are unable to gather the evidence in time but you really do want to respond, you can write a letter to the IRS requesting an extension to respond to the penalty notice. The extension is not guaranteed, IRS can still deny your request and assess the penalty. But if you are in a bind, and you want more time, it can’t hurt to request additional time. Typically they will grant you an extension.
Keep supporting evidence of correspondence
Post-COVID, IRS is so far behind on mail that they might actually generate a notice indicating you didn’t respond to the penalty letter and assess it to you, even though you did send a letter before the deadline. So be cognizant of that and register the mail you send, take a time-stamped picture of the correspondence or find a fax number. Faxing to the IRS is the quickest way for them to get the notice (don’t forget to keep your fax confirmation). Whether you respond to the penalty notice or you ask for additional time, send a certified US mail with a return receipt as well as a fax. And if you don’t have a fax number on the notice, you can contact IRS directly and ask them if there’s a fax number for the department that generated the notice.