There are several reasons a person may be charged penalties related to their income tax. The Internal Revenue Service (IRS) is responsible for charging these penalties for federal income tax returns. There are other agencies that charge penalties for state and local issues. If the taxpayer has a valid reason, these penalties may be appealed with a tax return penalty appeal letter.
Federal penalties may involve money or the forfeiture of property. If there are criminal penalties, it may mean jail time for the person, but this can only be imposed by a federal judge after the person is convicted. Monetary penalties are usually based on the amount of tax that wasn’t paid. Time is also a factor because if years of not paying taxes have gone by, the monetary amount may be higher. Most penalties are a fixed amount or a fixed percentage of the amount of tax owed. These penalties can be appealed and may be abated or waived if the taxpayer can show reasonable cause for their failure to pay.
Taxpayers have the right to appeal if the IRS sends them notification of adjustment to their tax return. However, if the correspondence was a bill with no mention of appeal or if the taxpayer simply can’t afford to pay the penalty then appeal is not for them.
Known as a penalty abatement request, there are four main categories for appeal:
• Reasonable cause is judged on an individual basis and may result in a penalty abatement if the cause is proved valid.
• Statutory exceptions are based on the Internal Revenue Code and may provide an exception for the taxpayer.
• Administrative waivers are caused because of delays created by the IRS and not the fault of the taxpayer.
• Correction of service error is based on an error of computing made by the IRS. When this is caught by the taxpayer, the penalty may be abated.
It is recommended by the IRS that taxpayers have the help of a professional when making a request for tax penalty abatement. The professional could be an attorney, a certified public accountant or someone enrolled as an agent that is authorized to practice before the IRS. If the professional will speak on behalf of the taxpayer, the professional must show a signed power of attorney from the taxpayer. In any case, if the reason is valid, the taxpayer must plan his or her request carefully.
The following things should be considered before planning to appeal a penalty. If the taxpayer believes any of the following things, he or she must have the documents to prove it.
• The IRS misrepresented the law
• The IRS did not properly apply the law because of a misunderstanding
• The IRS is taking inappropriate collection action or it denied an offer of compromise
• The IRS used incorrect facts
Most people make a penalty appeal based on reasonable cause. This means things that were out of their control caused them to fail to file their income tax form. Some reasonable causes are:
• Serious illness
• Natural disaster with damage to the home or person
• Fire that destroyed a person’s financial documents
• Bad advice from a tax adviser
• Death of an immediate family member
• Unforeseeable delays such as a postal strike
The letter from the IRS notifying the taxpayer of their fine should also contain instructions about how to appeal and what forms are necessary.
Below is a sample penalty abatement appeal letter. It should be written in formal business-letter style, sent by certified mail with a return notice requested and sent as a cover letter with the proper application forms.
Sample Penalty Abatement Appeal Letter
Name of Taxpayer
SSN of Taxpayer
Address of Taxpayer
City, State, Zip Code
Internal Revenue Service Appeals Department
City, State, Zip Code
RE: Penalty Abatement Appeal
To Whom It May Concern:
I received the enclosed letter that is dated DATE from you concerning a penalty I need to pay for the late filing of my income tax for the tax year YEAR. The letter states that I have the right to appeal this penalty, which is why I am writing this letter.
I filed late because my house burned to the ground the previous February destroying all of my financial papers. It took me several months to gather enough copies of the major documents to be able to file my income tax returns.
I have filled out all of the required forms and included them with this letter. I have also enclosed proof of the fire and proof that I contacted many people to get copies of my financial documents.
Kindly consider my situation and grant me a waiver of the penalty. I can be reached at Phone Number or at Email Address if you have any questions.
Signature of Taxpayer
Printed Name of Taxpayer
List of Enclosures
By Andre Bradley