penalty abatement

[Kea]

Client was a postal worker now retired on disabilty. 1099R has code 3 in box 7 and no indication of taxable portion of pension. I did it correctly in 2009 and changed software in 2010. I thought everything had rolled over correctly (because there was some info in the worksheet) and it was mid-April (blah, blah, blah) and they had taken out a large 401(k) distribution. Anyway, I screwed up and showed it as non-taxable in 2010. Caught it in 2011 and amended - agreeing to pay penalties.

Now I'm wondering if I should request penalty abatement. I hadn't considered it at first since it is obviously an error. The "increse in failure to pay penalty" is $600. Is there any reason IRS would abate the penalty or would I just be wasting my time? If it is worthwhile to try, what do I put in a letter?

Thanks

[kcjenkins]

Yes, it's worth a try, at least. Put in basically what you said to us, that the error was " the preparer's error due to a change in software that caused the 1099 to be treated incorrectly". Note that it WAS treated correctly the year before, and the error was caught the next year, and treated correctly, and the one year of the error was amended as soon as you discovered it. That is an important point in your client's favor. Good luck. I'm assuming that you paid that part of the bill, or are about to, so it's your $600 you are trying to save.

[BulldogTom]

One thing that I like to put in letters is "The error was not an atempt to circumvent the revenue laws of the United States, but merely an oversight while dealing with the complexities of the those laws. The taxpayer has a long history of timely compliance and immediately remedied the situation when the error was discovered."

Generally works for me.

Tom

Hollister, CA

[Margaret CPA in OH]

That sentence is worthy of saving, Tom. And I have done so on the outside chance I might need it someday.

[jainen]

>>Generally works for me<<

Me too. I always take the position that the purpose of penalties is to ensure compliance, not to punish. The important thing is not so much that somebody made a mistake but that the taxpayer has taken (and can document) specific changes so the problem won't happen again. The early self-correction is perhaps your strongest point. I always emphasize a history of timely filing and whatever other compliance I can reasonably aver.

There should be no penalty under this theory IF in fact it was preparer error. But there are a couple of elements to that. First, the taxpayer must have provided all relevant information to the preparer. Then the taxpayer must have relied on the preparer's advice in good faith.

I think that is a weak point in the original post, and should be addressed in the abatement request. Specifically, the taxpayer is supposed to review the return in good faith. Was it reasonable to think that the large distribution would be non-taxable this year when it had been taxable the prior year? It might have been better left off entirely, so you could claim the 1099 was lost or forgotten in the rush to deadline. But there it was right on the front page.

[Kea]

The large 401(k) distribution was taxed in 2010. I think that is part of why I missed my disability pension error. The 2 year comparison showed a large increase in the pension / IRA line so I guess I just didn't notice that the disability pension was not in there.

But it's not too late to send a letter? I wish I had thought to send it with the amendment.

Thanks for the wording suggestions. I haven't written this type of letter before.

[Terry O]

Tom, I like your sentence - - may I also use it?

[BulldogTom]

Sure - I learned it when I was taking a class on IRS correspondence.

But if you feel so inclined, you can make a payment on my student loans that I am still paying to help defray the cost of learning this little trick. (just kidding- of course).

Jainen sounds almost like the professor I had teaching that class. If the purpose of penalties is to ensure compliance, and the compliance was attempted, then the IRS should not have a reason for imposing a penalty, so long as corrective action was immediately performed.

FYI - it does not work on the Republik of Kalifornia. They view penalties as revenues that cannot be lost by the state.

Tom

Hollister, CA

[jainen]

>>They view penalties as revenues that cannot be lost by the state.<<

According to the California Taxpayers Bill of Rights, "The revenue is properly protected only when the true meaning of the statute is ascertained and applied." Of course, directly claiming your rights destroys any chance of working things out in examination. Just always keep the principle in mind when writing a response. OldJack has some fine verbiage, but it's not a magic spell so don't use it like a boilerplate. A standard approach will get the standard result.

The law says taxpayer needs reasonable cause for penalty abatement. Anybody care to comment on my suggestion that the original post was NOT about preparer error?

[BulldogTom]

Of course you have pointed out the weakness in the argument. The post above does not say that the taxpayer questioned the treatment of the payment, nor did the preparer give them advice that it was non-taxable.

On the other hand, the placement of the item on the form with other items of income distorted the clarity of the item, causing the oversight by the taxpayer. Also, as the payments started a new phase of the taxpayer's life with new forms and third party reporting documents with new areas to look for data for the tax return, and the tax treatment of those items was new to the taxpayer, it is understandable that they were unable to pick the error out of the amount shown on the tax return. It is also possible (given that these were retirement payments) that the taxpayer's mental facilities were impared by age, causing confusion over the tax treatment.

Not saying that is the case, but it COULD be the case.

Tom

Hollister, CA

[jainen]

>>the placement of the item on the form with other items of income distorted the clarity of the item<<

Not bad--you say they would have put it on the tax return correctly if they just didn't have to put it on the dang tax return!

Well, in this particular case it seems to be true. The way the IRS has April 15 set up is a problem for taxpayers needing to review their returns with the preparers. Something got missed, okay, but they did find and correct it right away. Assuming they also paid right away as always, and the preparer blamed the software but promises to take a good update class and the wife blamed the husband but promises to file earlier next year, Kea will save $600. Good time to donate to Eric.

[JohnH]

Before writing anything, I'd call IRS (with the client conferenced in on the call) and inquire about an abatement. I've been pleasantly surprised by what the person on the phone could do on a few occasions. Sometimes it's a matter of getting the right person when you call - if you get a jerk it's usually easy enough to find an excuse to end the call and then phone back later.

If that fails, then there's still the opportunity to write a letter. Maybe something that was said on the phone might even help in getting the wording in better form. If the letter fails, there's always the opportunity to write another letter (or more), adding a few more details. For $600 it might be wortwhile to make a couple of phone calls and write 2 or 3 letters before completely rolling over.

[Terry O]

Thanks Tom!

And I agree with JohnH - -in over 30 years I have found a well written "I can't believe I let this error slip by" letter usually results in penalty abatement.