Form 843 - Do you have reasonable cause?

For taxpayers who owe the IRS back taxes, penalties and interest are often a large portion of the tax debt owed. Under special circumstances, the IRS offers what is called a penalty abatement. Penalty abatement helps taxpayers who have been penalized by the IRS get rid of the penalties. The two most common penalties are assessed for failing to file a tax return on time and not paying the required amount of taxes timely. It is important to note that not everyone will qualify for the penalty abatement. The Internal Revenue Manual (IRM) proposes fives questions (listed below)  to IRS agents regarding penalty abatement. If you can answer positively to each of these questions, then you may have an opportunity to substantially reduce your tax debt by applying for penalty abatement.

  1. Did the taxpayer exercise ordinary business care and prudence in relying on that advice?

  2. Was there a clear relationship between the taxpayer’s situation, the advice provided, and the penalty assessed?

  3. What is the taxpayer’s prior tax history and prior experience with the tax requirements?

  4. Did the IRS provide correct information by other means (such as tax forms and publications)?

  5. What type of supporting documentation is available?

Understanding how the IRS will determine whether or not you qualify for penalty abatement can save you the time and costs of hiring a tax attorney or Enrolled Agent. Economic hardship is typically not considered reasonable cause by the IRS for abating any penalties you owe on your back taxes. The IRS reasons that if you had any income, then you should have paid the taxes you owed on it at the time they were owed instead of using that money for something else. Very special circumstances must exist for economic hardship to be a reasonable cause for penalty abatement. An example of this is if you or one of your dependents was ill at the time the tax was owed and if a medical bill wasn’t paid then the illness would have gone untreated. However, it is crucial that you have the records (W2, Schedule C, Profit & Loss, monthly expenses, etc.) to prove that both bills could not be paid and that you had to choose between one or the other.

The Internal Revenue Code (IRC) acknowledges that its agents, although very well trained, are not perfect, and sometimes may give erroneous advice to taxpayers. For this reason, the IRS allows taxpayers who owe back taxes due to an IRS error to abate the penalties and interest that were a direct result of the bad advice. When taxpayers call the IRS to ask for advice, the agents are typically too busy to send individual emails stating the advice that was given to each taxpayer in a timely manner. For this reason, proving that an IRS agent gave you false guidance can be difficult. If you find yourself in this situation, you must provide the following documentation to the IRS as evidence:

  1. The office you called for the advice.

  2. The name and other identifying information of the agent who provided the advice.

  3. Where the IRS agent found the information, including the office and method by which the advice was obtained.

  4. The date the advice was given to you.

Penalty abatement is a very technical piece of the tax resolution process because it requires knowledge of several specific tax codes. For more information on how the Hillhurst Tax Group located right off of Los Feliz and the 5 Freeway can help you with all of your IRS tax problems or general tax questions, email us at info@hillhursttaxgroup.com or call us to set up a free consultation with our Los Feliz Tax Attorneys and Enrolled Agents at (323) 486-3314.