IRS Penalty Notices

It's time for a refresher on how to deal with notices from the IRS and State tax agencies claiming that a penalty should be applied or another change needs to be made to a recently filed tax return.

The first thing to remember is that, contrary to popular belief, IRS and State tax agencies aren't infallible. They make mistakes. I don't mean to burst anyone's illusions, but more times than not, notices they send out are either completely or partially wrong. I've never done a scientific study; but at least 75% of the notices I have reviewed have been seriously in error. Who knows how much money they get from people who are either too scared to question the IRS's accuracy or simply labor under the misconception that they are always right. So, before sending off a check, have your tax pro check it for accuracy.

If, as it usually is, there is an error in the notice, write to the IRS or State and explain the error. The first letter doesn't always do the trick. It then becomes a game of bluff. I have often seen IRS and States deny a waiver request, only to accept it after sending the exact same letter back a second or third time. If you know that you are right, do not give up at the first level. Write to the Taxpayer Advocate's office next. If all else fails, contact the local office of your elected officials. They have staff designated as liaisons with the tax agencies.

I have often heard IRS personnel suggest that you pay the bill and then request a refund. That is the absolute worst thing you could so if you feel you are right that you don't owe the money. Do not ever send in any payment for a tax penalty that you are not positive that you owe until you have exhausted all appeal options. On far too many occasion, I have found that they use any prepayment as an admission of guilt, reducing the chance of recovering the money to almost zero. You completely lose all negotiating power once they have your money.

Many people panic over the deadlines given in penalty notices and worry that they will be hauled off in shackles if they don't pay the bill by that particular date. Those dates are just arbitrary ones and, if you don't truly owe the money, mean nothing. You may receive a follow-up notice if they haven't heard back from you by that date, but nothing serious.

Again, contrary to popular belief, penalties are negotiable. Interest charges on late payments are not. However, if you can explain why a penalty should be removed, it and the interest on the penalty will be taken off the bill, normally making a sizable dent in the original amount requested.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/08/2003 03:20:00 PM Send this post: