How Do I Get the IRS to Waive Penalties?

In some instances, usually when it comes to an isolated late-filing penalty or a failure-to-pay penalty, the IRS may apply a one-time courtesy waiver, within the IRS’s discretion. Typically, with the exception of the fraud penalty, most IRS penalties will not apply where the taxpayer acted in good faith and had reasonable cause for the error despite the exercise of ordinary care and prudence.  Any relevant facts may be considered in determining whether the penalty may be avoided based on reasonable cause and good faith. 

Demonstrating Ordinary Care and Prudence

Reasonable cause is established for individuals, per the IRS’s Internal Revenue Manual (IRM), “[i]f there was a death, serious illness, or unavoidable absence of the taxpayer or a death or serious illness in the taxpayer’s immediate family (i.e., spouse, sibling, parents, grandparents, children),” where a reasonable mistake is made, or if there were circumstances beyond the taxpayer’s control.  See IRM  However, the circumstances specifically listed in the IRM are not the exclusive bases for dropping a penalty due to reasonable cause.

Section 3.c. of of IRM provides:

“When considering the information provided in the following subsections, remember that an acceptable explanation is not limited to those given in IRM 20.1. Penalty relief may be warranted based on an “other acceptable explanation,” provided the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time. See IRM, Ordinary Business Care and Prudence.” 

Blaming Your CPA or Return Preparer

It is well established that good-faith reliance on a tax professional, such as a CPA or tax attorney, is a dispositive defense to a penalty.  See, e.g., Pessin v. Commissioner, 59 T.C. 473, 489 (1972); Jorgl Ma-Tran Corp. v. Commissioner, 70-T. C. 158, 173 (1978); Garcia v. Commissioner, T.C. Memo. 1998-203, affd. without published opinion 190 F.3d 538 (5th Cir. 1999). 

Good faith reliance applies in Tax Shelter cases as well, but the IRS will also consider whether the taxpayer was likely aware that the tax position was too good to be true.  The IRS’s Audit Technique Guide, in a chapter titled “Accuracy–Related Penalties for Taxpayers Involved In Tax Shelter Transactions,” the IRS’s guide provides that “[t]he most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability,” which will be considered along side “the taxpayer’s experience, knowledge, sophistication and education and the taxpayer’s reliance on the advice of a tax advisor.”

Posted on 04/03/2020 by Daniel W. Layton, Esq. He may be contacted at (949) 301-9829.