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PART III: Penalties and Interest
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- Each year, the IRS issues over thirty-four million penalties against
individuals and businesses. Revenue from these assessments is often in
excess of $15 billion. As a result, this is one of the largest sources
of continuing frustration for citizens. Every year, the Taxpayer Advocate's Annual
Report to Congress places penalties high on the list of the
twenty most serious problems faced by citizens. A survey by the IRS of
tax professionals shows that professionals consider penalties to be the
fifth most serious problem faced by citizens. Fortunately, there is a simple
and highly effective method of dealing with penalties. Unfortunately, the
IRS does not often tell the truth about the procedure.
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- To make matters worse, interest on a tax bill often doubles, triples--even
more--the debt. And this is one area where the IRS flat lies about one's
right to deal with the problem. IRS publications declare that interest
is always added and can never be canceled from a delinquent debt. While
that is true in many cases, it is not a universal rule. There are several
circumstances under which interest is legally subject to cancellation and
like penalties, the procedure is quite simple.
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- PROBLEM 6:
THE IRS ISSUED A COMPUTER NOTICE CLAIMING I OWE PENALTIES
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- CONSEQUENCE:
- You have to pay additional money in the form of the penalty and the
interest on the penalty.
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- SOLUTION:
- Make a written request for abatement. The tax code gives you the right
to request cancellation of any IRS penalty. Every one of the more than
140 penalty provisions of the code contains what is called a good faith
exception. It means that if you acted in good faith and based upon a reasonable
cause for your actions and not out of a deliberate attempt to cheat, deceive
or mislead the IRS, the penalty does not apply. The procedure for seeking
cancellation of penalties is remarkably simple. It does not even require
a special form.
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- To make a request for cancellation of penalties, simply respond in
writing to the IRS service center that issued the notice. Address your
letter to the Adjustments/Correspondence Branch and clearly identify it
as a "penalty Abatement Request." Then, in great detail, give
the facts and circumstances of the case. Take care to set forth details
allowing the reader to conclude that you acted in good faith and based
upon a reasonable cause for your actions, and not out of a deliberate attempt
to cheat. Be clear not vague. Give dates and names where appropriate. To
the extent possible, provide copies (not originals) of documents you rely
upon to support your claim. For example, if you claim that an accident
prevented the filing of your tax return on time, provide all the details
of the accident, including hospital and physician reports, insurance claims,
medical bills, etc., to buttress your request. Always send your correspondence
to the IRS using certified mail with return receipt requested.
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- My best-selling book, The IRS Problem Solver Book, contains a chapter on the penalty cancellation process.
In great detail, I walk you through the process of canceling the most common
penalties, including the failure to file and failure to pay penalties which,
combined, are assessed more than 15.5 million times annually. The book
also walks you through the process of appealing an adverse decision on
your penalty abatement request. In addition, our Penalty Special Report
provides excerpts from dozens of pages of IRS manual on the penalty cancellation
process. It gives you the acceptable reasons, right from the horse's mouth,
why penalties are canceled.
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- PROBLEM 7:
THE IRS ADDED PENALTIES TO MY PREVIOUS BILL.
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- CONSEQUENCE:
- An already high tax bill grows even higher.
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- SOLUTION:
- Ask for abatement of penalties. At anytime during the collection process,
penalties are subject to cancellation on the basis of good faith, reasonable
cause. Even if your tax bill is many years old and the penalties date back
those several years, they are subject to cancellation when you can demonstrate
facts showing your good faith. Always make every attempt to cancel penalties,
especially on those bills that are aged. Cancellation has a dramatic positive
impact on cutting the bill.
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- If you have equity in a home or other real estate and can pay the tax
using that equity, canceling the penalties can be your ticket out of tax
trouble. They key is to make your application for penalty cancellation prior
to paying the penalties. Once the IRS cancels the penalties, use the equity
in your home to pay the remaining balance of tax.
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- We work with a lender who can help you accomplish this. Because most banks
are frightened when it comes to dealing with the IRS, you need a lender with
experience dealing with tax liens and IRS claims. That is why we made
arrangements with Northern Lights Mortgage to help you tap the equity in
your home or other real estate to pay the IRS. To begin the process, just
complete the Premier Mortgage "Fast-App" and fax it to the number shown on the form.
Northern Lights will do the rest. If you have questions, call Brian Nelson
toll free at 1-866-913-2600.
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- PROBLEM 8:
IRS ADDED PENALTIES TO A BILL DETERMINED FROM A TAX AUDIT.
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- CONSEQUENCE:
- The trauma of a tax audit is exacerbated by the fact that penalties
are added to the bill.
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- SOLUTION:
- Demand that the penalties be excluded. Even if you owe the tax alleged
in connection with an audit, the penalties must be excluded when you can
prove good faith, reasonable cause. Before you sign off on any audit decision,
review the report to see whether it includes penalties. If so, challenge
the penalties by submitting a detailed abatement request to the auditor
who conducted the examination. Make it clear that you will not accept any
audit decision that includes improper penalties. Explain that you intend
to exercise your right to appeal the audit decision if they are not removed.
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- PROBLEM 9:
THE IRS ASSESSED THE TRUST FUND RECOVERY PENALTY.
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- CONSEQUENCE:
- The employment tax debt of the business becomes collectible from your
personal assets, including home, bank accounts, etc.
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- SOLUTION:
- Appeal the penalty assessment. The Trust Fund Recovery Penalty is used
to collect unpaid business employment taxes from the owners or managers
of a failed corporation. The law allows the IRS to assess the penalty against
the company's "responsible officers," those who should have paid
the tax but did not. However, in many cases, the IRS uses the shotgun approach,
assessing the penalty against any corporate employee who had a hand in
the company's finances, whether or not they are legally considered "responsible
officers."
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- A responsible officer is the person within the company with the ultimate
authority to dispose of company assets. He is the person (or persons) making
the decisions as to which creditors get paid and which do not. If you do
not have such authority, you cannot be the responsible officer, whether
or not you may have signed company checks.
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- To challenge a Trust Fund Recovery Penalty assessment, write a protest
letter explaining that you wish to challenge the assessment. Ask for a
hearing before the IRS' Appeals Office. This is the section of the IRS
set up to hear appeals and which has the authority to overturn just about
any IRS decision. Be prepared to submit details on what role you played
in the company and who was in fact responsible for making the critical
financial decisions that left the IRS unpaid. My book, Taxpayers
Defense Manual, chapter six, provides the step-by-step details for
making this appeal, drafting your arguments and presenting the case. IRS
Publication 5 explains how to write a protest letter. It is included in
our Forms Kit and Resource Guide. This process is not difficult when you
have the right guidance.
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- PROBLEM 10:
THE IRS UNFAIRLY ADDED INTEREST TO MY TAX BILL.
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- CONSEQUENCE:
- With interest compounded daily, the tax debt is pushed higher each
day.
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- SOLUTION:
- Ask for cancellation of the interest. The IRS flatly denies that interest
is subject to cancellation, but the law provides three clear situations
in which it may be canceled. The first is where the interest is attributable
to IRS delay that occurs while processing the case. The second is where
the interest is attributable to an IRS error. And the third is where the
interest is attributable to an erroneous refund issued by the IRS but which
you in no way caused.
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- Request cancellation of interest much the same way you do penalties.
Write a letter to the service center handling your account. Provide detailed
facts to allow the reader to conclude that the interest is attributable
to one of the three areas mentioned above. Document your claims every way
possible. Be specific, not vague. Argue that you are entitled to have all
or part of the interest canceled. Chapter seven of The
IRS Problem Solver Book covers the interest abatement
process in great detail, giving examples of letters use in each of the
three instances in question.
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