One of the most publicized topics of IRS indiscretion and abuse is the incorrect application and assessment of interest and penalties. Due to complexities surrounding exceptions, exemptions and application of penalty and interest charges, the IRS admits overcharging interest on 40% of the accounts reviewed during an internal audit, according to an Inspector General report (2002-30-042) released in December 2001.
To protect client interests, The Tax Practice recommends review of all penalty and interest notices to ensure proper application of the tax code. Such reviews have led to the successful recovery of thousands of dollars in erroneous charges emanating from government math errors or misapplication of the law.
A technical problem excluded from the Inspector General report involves payroll deposit penalties. Internal Revenue procedures authorize the government to reduce late deposit penalties by optimizing or redesignating deposit dates. However, IRS penalty notices do not comply with the optimization procedure. The Tax Practice has routinely reduced client deposit penalties in accordance with the procedure. Abatement and penalty reduction requires compliance within a narrow statute of limitation. If clients benefit from this issue, adjustment must be submitted to the IRS within 90 days upon issuance of the first penalty notice.
In addition to abatements attributable to government error, The Tax Practice has successfully reduced or eliminated client penalties due to mitigating circumstances or what the government refers to as reasonable cause. The government may refund, abate or reduce late payment or filing penalties if you find yourself unable to pay or file your income or payroll taxes due to circumstances beyond your control. To qualify, you must have been a victim of embezzlement or theft, fire, flood, windstorm, or other disaster.
Additional circumstances qualifying for abatement include:
- Reliance on incompetent tax advice
- Reliance on incorrect written advice from Internal Revenue
- Lost or destroyed records
- Death of a taxpayer or family member
- Debilitating health problem (taxpayer or family member)
- Divorce impacting financial and/or mental stability
- Drug and/or alcohol problem (taxpayer or family member)