Don’t be Afraid of the Big Bad…Tax Notice
With the 4/15 filing date behind us, this is the time of year where clients often receive tax notices from the IRS. Receiving mail from the IRS is often very scary for clients, regardless of what the letter says. Rest assured, there is generally no need to panic and oftentimes the notice is generated by a computer as a result of an error on the side of the IRS in processing the return.
Two weeks ago, I received the same letter for four different clients, each indicating failure to pay penalties for estimated tax. One of the clients had a penalty in excess of $2,000 and was quite upset at the prospect of paying it. What you need to remember is that the IRS makes mistakes too. Each of these taxpayers were qualified farmers who filed and paid their tax prior to March 1, 2023. Because these requirements were met, penalties would not apply. The IRS’ system simply made an error. To resolve, a simple letter usually does the trick and is easier than getting through on the phone.
But what if the penalty is valid? There are two ways to request a waiver. Failure to file, failure to pay and failure to deposit penalties are all eligible for a waiver if the taxpayer is considered compliant either in the past or currently, which means:
Past Compliance
- Filed the same return type, if required for the past three years before the tax year you received the penalty
- Did not receive any penalties during the prior 3 years, or any penalty was removed for an acceptable reason other than First Time Abatement
Current Compliance
- Filed all required returns or filed a valid extension
- Paid or have a valid payment plan in place to pay all taxes due for years other than the current year for which relief is requested
Requesting first time abatement requires a phone call to the IRS or a letter written in response to the notice. The other option to First Time Abatement is requesting relief using reasonable cause. This is a facts and circumstances based test. Examples of reasonable cause include serious illness, inability to obtain records, natural disasters, etc. This type of relief is requested via written letter to the IRS. I sent a taxpayer their extension information earlier this week and received an email back from the husband that his wife was in labor. He was not sure he would be able to make the due date with the payment…I suspect that will qualify under the reasonable cause provisions.
Two final items to keep in mind. The IRS takes First Time Abatement before reasonable cause. If there is a penalty in 2022 that isn’t that large but for which you had reasonable cause, it may be best to just pay it rather than burning through the proverbial Get Out of Jail Free card that First Time Abatement represents if there is any reason to believe another penalty could be coming in the next three years. Finally, do not pay anything until you are certain you owe it. Too often these letters terrify taxpayers and they just write a check to make it go away. Several years ago I had an elderly client write a check for $45,000 in tax and penalties because the IRS did not have the basis on his stock sales reported correctly. He wrote the check and then brought in the notice…we promptly amended his tax return to get it back. More often than not, the letters are wrong or can be worked around. Don’t react unnecessarily.
Kelly Jackson Hardy is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers, privately-held elevators and supply dealers, and cooperatives. Kelly is a principal with CliftonLarsonAllen in Princeton, Illinois, as well as a regular speaker at tax and estate planning seminars. Kelly was raised on a hog, row crop and cattle farm in central Illinois and has been involved in the ag industry her entire life. Kelly, her husband, and two sons are active in 4-H and operate a small feeder calf operation and pumpkin business.
great article, thank you!