Category: Tax Resolution

How To Use the First Time (Penalty) Abatement to Get Rid of Nasty Penalties!

Did you know that the IRS will give you a First Time Abatement of a penalty?  What this means is if you are assessed a penalty on your tax return, there is an easy way to get out of it.

This wonderful tool is called, drum roll, the First Time Abatement, or FTA and is statutory (in the IRS code).  This means, if you qualify you get the penalty tossed out.  All you have to do is ask.

Depending on the type of penalty and when it was assessed, if you qualify you can save thousands.  Let’s take a good look at how I use it and how you would qualify.

Let’s talk about the IRS Penalty Maze

The IRS can imposes a penalty on just about anything tax related.  Generally the penalty is based on the tax liability (but not always).  They have late filing, late payment, underpayment, under-reporting and substantial under-reporting penalties.

They will charge a partnership by the number of partners if the return was filed late.

If you forget to take a required minimum distribution from your IRA, they charge you on the amount you should have withdrawn EVERY YEAR until you correct the non distribution (i.e. take the money out).

And as a further slap in the face, they charge you interest on your penalty and then again on the added interest.  No joke.  They can calculate interest daily.  Each day adds to the balance, so you are essentially paying interest on the penalty that caused more interest to get charged.

See.  A freaking maze.  With eight types of penalties in their quiver.

The IRS Throws you a Penalty Sized Bone.  The First Time Abatement Program

The FTA gives relief by waiving certain tax related penalties, provided you qualify.

Penalties that can be waived are:

  • Failure to File penalty – You filed your tax return late.
  • Failure to Pay penalty – You didn’t pay your taxes before the deadline.
  • Failure to Deposit penalty – You didn’t make your tax deposits by their due date.

Failure to file penalty waivers are for Individual, partnership and S Corporation returns.

Failure to pay abatement is also limited to the amount shoul, but not paid by the return due date; or tax that wasn’t on the return but was later assessed by the IRS and NOT paid by the due date on the notice.

Qualifying is straight forward.  To qualify:

  • Timely file the same tax return for the three years prior to the year you are requesting abatement.
  • Didn’t receive any penalties during those three years, or have a penalty abated by the FTA.
  • If you are self-employed and required to make periodic deposits, be they estimated tax payments or payroll deposits, you can still be granted FTA is you have no more than four waived failure to deposit penalties.

How To Apply for Penalty Relief with the First Time Abatement

  • The first way is to read the notice the IRS sent.  Some notices have instructions on how to have the specific penalty you have been assessed on the letter abated.
  • Give the IRS a call.  I’ve gotton most of my penalty abatements over the phone.  Once again, check your notice.  The appropriate number you need to call will be in the upper right hand corner.
  • Write a letter (here’s a template) and send to the address on the notice.
  • Form 843, Claim for Refund and Request for Abatement can also be used.  Since it is used for several purposes, it might seem confusing.  This would be your last option.

You won’t have to specifically ask for First Time Abatement as they are supposed to review your account first to assess whether you would qualify for FTA.  If you don’t qualify, you may qualify using an Administrative Waiver, or having a Reasonable Cause.

Make That Interest Disappear Too!

Even though the First Time Abatement helps remove penalties, it doesn’t directly address interest charges, indirectly it reduces interest by removing an amount that would usually have an interest charged against it.

No penalty, nothing to charge interest on.  The gift that gives a little more than expected.  Not bad IRS.

Success Stories?

I won’t insult your intelligence with some BS made up story about how John Q Taxpayer avoided $25,000 in penalties using the FTA.  In all honesty, abatements that large are highly unusual.  For someone to have a $25k penalty abatement, at a minimum they owed $100,000 pre-penalty (the max late filing penalty would be 25% of the tax liability).

But the above scenario is more than possible.  Maybe you know you owe a bunch and are doing nothing more than avoiding the pain.  But you’ve inflicted a lot more pain by being avoidant.

This should be the first tool used when a tax problem appears.  If you qualify, you can’t be denied.  That’s a success in itself.

You Need to MAINTAIN Tax Compliance Now

Part of qualifying is having a perfect tax record for the prior three years.  You can’t use the FTA for another three years.

But that’s not my point.  Maintaining a clean tax record takes a little organization.  And it’s an area you must develop unless you want to be back in this position (or worse) next year or the year after.

In my career, I have noticed that people who have tax issues tend to have them for a great part of their life.  It’s not usual for me to have to help clients deal with multiple tax years, multiple times.  You need to make a concerted effort to make sure htat isn’t you.

Conclusion: FTA is a No Brainer and you Don’t Need to Hire Me!

I think the First Time Abatement for penalty reduction is underutilized.  Most taxpayers (i.e. not tax geeks like me.  You know.  Normal people.) are aware of the premise of an Offer in Compromise.  They understand there is a way to get their tax debt reduced.

They know they can make payments over time using an Installment Agreement.

I’ve even had people come through my doors asking if I can help get them on Currently Not Collectible status.

But no one seems to know about the easiest and most automatic relief available.  If you qualify, there is a letter (here’s a template) you send in and the IRS approves you.  If you don’t qualify for FTA, you can still apply for a waiver based on an Administrative Waiver or a Reasonable Cause.

The FTA isn’t going to be life changing, but every dollar saved matters.  Plus, it gives you some of your lost power back.  Nothing is worse than the feeling of financial stress (been there, hate that I’ve done that).  I hope my articles can help you get your power back.

That’s it for now.  Hit me up in the comments if you have questions.

Stay cool.

JKC

The IRS Currently Not Collectible Status: A Tax Guys Magic Wand

I’ll say it.  The IRS Currently Not Collectible status is THE BEST.

Anyone with a big tax problem, with neither the resources nor time currently available to resolve said tax problem, should look into being classified as Currently Not Collectible.

The complexity and depth of tax laws and financial obligations can sometimes lead even the most diligent and proactive individuals and businesses into some really dark places.

A great fear many people share is that fear of the IRS coming and taking your car or cleaning out your bank accounts.

Yeah.  That can happen.  But you really have to screw up for them to go that far.  As long as you communicate with them, they will work with you on your tax problem.

Financial hardships happen.  If paying your taxes becomes an insurmountable burden, the Internal Revenue Service (IRS) offers a lifeline in the form of the Currently Not Collectible (CNC) status.

A Currently Not Collectible status won’t relieve you of your liability.  What it does is give you a temporary reprieve from IRS collection activity, and time to reboot your financial life.  CNC status lasts from 6 to 12 months.  It is possible (probable in my experience) that if approved, you will be on CNC status multiple years

How To Qualify for CNC Status

On the surface this seems easy.  You can’t pay.  You don’t have the money.  Your hours were cut back, or you were laid off and can’t find another good job.

The cornerstone of obtaining CNC status is by demonstrating your financial hardship. This entails showcasing an inability to pay basic living expenses due to dire financial circumstances.

You prove your hardship by showing bank statements, bills, past due notices…any third party documentation that can paint a clear picture of your hardship. Providing a complete and accurate picture of your financial situation is crucial, necessitating comprehensive documentation of income, expenses, assets, and liabilities.

How Do You Apply?

The application process is deep.  You will need to share everything as it relates to your financial health.  The key to being approved is to paint a picture of your situation using paystubs and bank statements to show income/money in, and bills, invoices and past due notices to show expenses/money out.

Prepare Form 433-F or 433-A, depending on your individual or business status. These forms serve as comprehensive snapshots of your personal and business situation.

The IRS takes this information, and reviews and analyzes the data to formulate an opinion as to your financial health.

If you are patient, diligent and thorough, you can put together a packet that gets you approved for CNC status.  However, if you don’t feel confident in dealing with an IRS Revenue Officer, contact a professional.  Be aware that not all CPA’s and Enrolled Agents do tax resolution.  Tax resolution is a specialty within the tax preparation realm. 

Now We Wait……..

Now the hard part (for you).  The IRS will analyze your documentation and poke and prod your finances until they understand where you are.

It’s very likely that the IRS will come back to ask for clarification, or additional information.  Make sure you get this to the Revenue Officer working with you ASAP.  Your Revenue Officer is working on upwards of 70 cases at a time, but if you get your info to them in an expedient way, they will bump you up their list of priorities.

After carefully scrutinizing your information, the IRS will issue a determination—approval grants the CNC status, temporarily suspending collection actions, while denial comes with an explanation of the reasons and alternative courses of action.

The Good, Bad and Ugly of CNC Status

What’s good about CNC status?

The benefits of obtaining CNC status are obvious. The IRS halts all collection activity against you.  You get a reprieve of sorts, allowing you to do what needs to be done to better your financial health.

A huge benefit (to me) is the fact that the IRS 10-year collection period DOES NOT TOLL.  This means it doesn’t stop.  This is a big deal since it reduces the time available for the IRS to pursue the tax debt.

What’s bad about CNC status?

On the surface, this does nothing with regards to reducing or paying your tax debt.  Interest and penalties also continue to accrue, adding to the debt.

What’s ugly about CNC status?

The ugly is the IRS doesn’t hand this status out like Tic Tacs (not TikTok for you Gen Zers :^)) .  It’s a complex process that involves a lot of back and forth with your Revenue Officer.

It also lasts just 6-12 months.  The IRS will require periodic updates to make sure nothing’s changed in regards to your finances.  This can also be a good thing.  If your financial situation remains static, say due to medical issues or a lawsuit, you may be able to retain CNC status for multiple years.

How can you lose CNC Status?

At the risk of sounding like a jerk, you’ll lose your CNC status if you start making enough money to pay something back each month.

Improving your financial situation will move you closer to losing CNC status.

If your situation hasn’t improved, then to maintain CNC status you must file all tax returns on time and pay your current taxes.  We don’t want to add to your already large balance. 

What can you do besides CNC Status?

Bankruptcy?

Removing federal taxes through bankruptcy is possible, but you have several hoops to jump through initially AND, the IRS can deny the write off.  I had a client qualify via bankruptcy to write off all but $350k of a $1.8mil tax debt.  IRS council denied the write off.  We ended up going a different route that cost the client $220k.  I wonder if that attorney lost their job?

Offer in Compromise?

If you’re in this position, and OIC is something to seriously consider.  You will probably be inundated with ads proclaiming they can get you off for “pennies on the dollar”.  An OIC might be the right direction, but it will cost you a lot more in professional fees.

Installment Agreement (or Partial Pay Installment Agreement)?

This is the most used option.  If you are having money problems now, I don’t see this as an option.  After taking a few years to clean up your finances, and depending on the sze of the tax debt, I can see using CNC to remove a few years from the 10-year collection window, then applying for a partial pay installment agreement.  This is the long way, but for a lot of people, the best way out.

Conclusion:  Using The Magic Wand That is Currently Not Collectible Status

CNC Status can be used in many different ways.

Time.

The IRS has 10 years to collect the tax you owe.  Use CNC Status to get the IRS to stop collection activity, thereby giving you time (and energy) to fix your money situation.

Easy to morph to another option.

You’ve already collected the info needed to prepare an Offer in Compromise, or a Partial Pay Installment Agreement.  If you foresee your financial situation remaining status quo for the foreseeable future, you may consider an Offer in Compromise at this time.

The same can be said about a Partial Pay Installment Agreement.  This option would be available if our situation improved a little and you could send “something” to the IRS.  You must also apply for a Partial Pay Installment Agreement.

Interest and Penalties.

Interest and penalties will continue to accrue, adding to our balance.  These are statutory charges, with minimal opportunity to remove.  Collection activity stops.  The debt doesn’t.

As a tax professional I’ve used CNC status A LOT.  When a client walks in looking like Eeyore, you know things are bad.  Tax problems are a big deal in the US.  There are over 14,000,000 open tax cases at the IRS.  Knowing the available options and how to use them is essential to getting you out of trouble.

But knowing how to use different options together is when you really save a lot of money.

So that’s it for today.  Thanks for your time and talk soon!

Stay cool.

JKC

Will an Offer in Compromise Relieve Me of this Horrible TFRP?

If the IRS has assessed a “Trust Fund Recovery Penalty” (TFRP) against you, you must take this very seriously.

As money withheld from employee paychecks, the IRS is very protective of this “Other People’s Money”. If this “other peoples money” is not properly deposited with the IRS, The TFRP will be assessed on those responsible for withholding and remitting payroll taxes to the government.

This penalty can be assessed on your own business, or, if you are an employee (not an owner of the business) and the withheld taxes have not turned over to the IRS, the could call you a “Responsible Person” and ask you to pay.

Wait!  That can’t be right, can it?  If you work for someone and part of your job duties were to prepare payroll, and your boss instructed you to NOT make the required payroll tax deposits, the IRS can hold you responsible???

Yep.  That’s what I’m saying.  Fair or not, the IRS calls this a “responsible person” penalty.  The IRS will always try and collect their money.

I. What’s a Trust Fund Recovery Penalty (TFRP) and Can an Offer in Compromise Help?

A. What’s a Trust Fund Recovery Penalty

Part of preparing payroll includes calculating the taxes to be withheld on each paycheck.  The company then adds their portion to this number and that would constitute that pay periods payroll tax deposit.

Most businesses will pay the payroll taxes withheld within a few days of payroll. If you owe less than $1,000 for a specific quarter, these taxes are paid when you file the quarterly payroll returns.

Payroll taxes are considered “Other People’s Money” (remember, you calculated the taxes to be withheld from your employee’s paychecks) so the IRS treats these payments a little differently than your income taxes.

That’s where the “Trust Fund Recovery Penalty” comes into play.  A responsible person can be the business owner(s) or the person tasked with preparing payroll and remitting taxes.

You CAN be a responsible person even if you don’t own any part of the business, or have signature authority on the bank accounts.

B. What’s an Offer in Compromise?

An Offer in Compromise is an IRS program designed to assist people with large tax debts (such as a trust fund recovery penalty) who won’t be able to pay without it horribly affecting their lives.

I don’t want to suggest that this is an easy way to get out of paying your taxes.  Ads claiming to get you out from under your big tax debt for “pennies on the dollar” are misleading.

The IRS is patient and will wait for you to pay. They have 10 years to collect. An Offer in Compromise may get you out of tax trouble, but you must qualify and the qualification bar is high.

There is also the cost of having someone prepare your application.  You can try yourself, but your chances of being approved are pretty low.  The OIC acceptance rate is usually around 33% overall (per the IRS in 2019).  You will see studies out there claiming anything from 5% to over 40%. 

C. Can an OIC help with my TFRP?

Short answer, yes.  But you have to qualify and the calculated amount must be less than the tax plus cost to prepare the application.

Let’s find out how to qualify.

II. Why The IRS Needs the Trust Fund Recovery Penalty (TFRP)?

A. Definition and Purpose of TFRP

The Trust Fund Recovery Penalty is put in place to ensure the government has enough money to operate.

Payroll tax deposits made by US businesses is the cash flow our government uses on everything it does.

When someone doesn’t remit the taxes withheld on peoples’ paychecks, there is less cash available to pay for things like our military, social security payments and money paid to states for things like education and Medicare.

How would your life be impacted if your employer stopped paying you, but still insisted that you kept working?  The TFRP allows the IRS to go after those who had responsibility to remit these withheld taxes.

B. How Does the IRS Know Who to Assess the Penalty Against?

The IRS can assess the TFRP against the business owner, an officer, a partner or an employee.  An owner, partner or officer can be held liable statutorily since they are already liable for other actions taken by the business.

The touchy one is when they go after an employee.  If you prepared the payroll and generally remit tax deposits, the IRS can hold you liable.

If you are/were an employee, the first thing we would do is collect evidence to support the fact that you DID NOT have any control or responsibility.  Easier said than done, but the first step.

III. Can An OIC Solve Your TFRP Problems?

A. The First Step Is to Do a Preliminary OIC Calculation

This is a seat-of-the-pants calculation to give you an idea what your offer will be.

Here’s part 1 of the calculation:

  1. How much is your monthly income?  If the amount is inconsistent, then come up with an average.
  2. What are your monthly expenses?  You’ll need to list these out.
  3. Regarding your monthly expenses, the IRS has limits on many expenses based on where you live.
  4. After paying your bills, you will know what your disposable income is.
  5. This amount is now multiplied by either 12 or 24 depending on how quickly you want to pay the IRS.

The next step is deciding how fast you can remit your offer amount to the IRS. If you use the 24 month amount, you have 24 months (or less) to pay off your liability.

If you use the 12 month amount, you must have your tax bill paid off within 5 months of IRS acceptance.

Part 2 of the calculation is as follows:

  1. Take the calculated amount from above.  We’ll pretend that number is $12,000.
  2. Make a list of all other assets and their purpose, i.e. business or personal.
  3. Exclude assets used for your business.  They must be business assets to exclude.  
  4. Figure out the equity in each asset.  That’s the amount you would get if you sold it. 
  5. As an example, this number is $25,000.  Add this amount to the first calculated amount.
  6. This is your offer to the IRS.  If you owed $250k, the $37k amount looks much better.  If you owed $25k, no bueno.

When attempting an OIC for a TFRP you must understand the “line” for the IRS is much higher. This is money that belongs to your employees, not you.

B. Who can apply?

This is actually pretty straight forward.  You can apply if:

  1. No unfiled or missing tax returns.
  2. Are not in bankruptcy.
  3. If you are the business owner, you must be current through the last 2 quarters with tax payments and employment tax return filing.
  4. If you are including the current year, you must be extended if you haven’t filed yet.

C. How To Apply

If you are an employee, you fill out form 656 and submit with the application fee, any tax deposit required and supporting documentation.   Supporting documentation can be anything from bank statements, bills and invoices you paid, and paystubs.

If you are the business owner, you will need to fill out form 433-OIC instead of form 656.  Depending on the amount owed, you may need to prepare forms 433-A and 433-B.

IV. Apply and Hurry Up and Wait

A. Submit your Offer in Compromise Application

Fill out the appropriate application and submit it with all supporting documentation.

If you make a claim on your application that you feel is important, make sure to include documentation to prove your point.

B. Now We Wait………

The IRS will now go over your application with a fine-tooth comb.  They will prepare their own calculations comparing them to your offer.  They can also corroborate your documentation.  The initial look-through will take around 6 months.

After the initial review, the IRS will most likely reach out to you asking for further corroboration.  They will be inquiring as to whether your financial situation has changed.  If your situation remains the same, they’ll look at the file again before making their decision.

C. Yes, No or We Need to Talk

Based on your application the IRS will either accept your offer or reject it.

Many times, however, they will come back to you with a different offer, or allow you to re-open negotiations.  Keep in mind that they WANT to resolve this case.

Once the IRS accepts your offer, you are required to keep up with your tax filigs, payments and estimate payments.  For the next 5 years, you cannot file or pay late.  You must pay your estimates if required.  You must be a model taxpayer.  Don’t give them an excuse to rescind the agreement, making the entire balance, plus penalty and interest fully due.

VI. What Alternatives Are Available?

A. Installment Agreements

This option allows you to pay the liability off over a period of time.  You have up to 72 months (6 years) to pay the debt.  There is also a possibility of a partial pay Installment Agreement.  If your finances won’t allow for full payment, then there is a possibility of making payments for 72 months and not fully paying the debt. Due to the size of most TFRP’s, a partial pay installment agreement might be the best course of action.

B. Currently Not Collectible (CNC)

This is a temporary fix.  Currently Not Collectible status is a pause in collection activity. This is for taxpayers who are in a temporary bind and only need time to sort things out.  If granted, the IRS will leave you alone, usually for 12 months.

This can be used to buy additional time to figure out your options.

C. Challenge the Trust Fund Recovery Penalty Assessment

THis is the first thing to look at.  The IRS will cast as wide a net as possible to collect their money.  There are two things the IRS looks at:

  1. The duty to perform the collection, accounting for and payment of trust fund taxes (what payroll withholdings are considered).
  2. The power to direct these actions.

The Chief Financial Officer of the company would qualify as a responsible person.  A data entry clerk simply doing what the boss says would not be a responsible person.  Many times, this must be proven to the IRS.

IX. Conclusion to Using an OIC on your TFRP

Finding yourself in this situation can be paralyzing.  Typically, the dollar amount is big.  Huge sometimes.  If there are a lot of employees, the required deposit will be large.  2-3 full-time employees paid twice a month can conservatively amount to $10k per month.  One quarter will then be $30,000 PLUS PENALTY AND INTEREST!

This all becomes even worse if you were an employee and have no ownership stake.  It makes no logical sense that you, as an employee, can be held liable for your employer’s tax debt but in this case it’s possible.

To qualify to apply you must be current on all tax return filings and not currently going through bankruptcy proceedings.

The IRS looks at three things when deciding whether to review your file:

  • Doubt as to Collectability – You don’t/won’t have enough income/assets to full pay.
  • Doubt as to Liability – The IRS made a mistake in assessing the tax.
  • Effective Tax Administration – This is subjective.  Think ‘Do the right thing” as it relates to the IRS.  I use this for elderly clients who will never be able to pay.  Effective tax administration isn’t as readily accepted as the other two options.

For the IRS to accept your offer, you must demonstrate:

  • An inability to fully pay your debt.
  • The hardship you would experience if you paid the debt in full. 
  • The amount offered must be more than the “Reasonable Collection Potential” amount calculated by the IRS using the info you submitted.
  • You must show the ability to pay the offer amount within the repayment period.

The IRS deals with payroll tax debts differently than income tax debts.  Payroll tax deposits is the cash flow the US Government uses for daily operations.

If you find yourself in this situation you need to contact an expert in the field.  The IRS will do everything in their power to collect.  We need to be ready to defend your actions and responsibility to make this bad dream go away.