First-time Penalty Abatement in California

What kills people when they have an IRS tax debt is the interest and penalties.  If you don’t file and pay your taxes when they become due, you can eventually find yourself owing much more than the original tax assessment.  It is possible to negotiate an abatement of penalties, but it isn’t always easy, especially for “repeat offenders.”

By “repeat offender” I mean those who have a history of non-compliance, (i.e., failure to file on time and/or failure to pay on time).  The IRS treats repeat offenders differently.  If you have no missing returns and no prior penalties for the preceding three (3) years, then you may qualify for “first-time abatement penalty relief.”  First-time abatement may be granted without consideration of individual circumstances and excuses.  However, if you do not meet the criteria for first-time abatement, then your only recourse would “reasonable cause penalty relief,” which can be very difficult to prove.  Chances are, what you consider a reasonable excuse for not filing on time or not paying on time will not be considered reasonable by the IRS.

The California Legislature is currently considering adoption of a bill that would provide a first-time abatement option for California taxpayers.  Under AB 1777, the Franchise Tax Board would give preference to non-repeat offenders like the IRS.  The requirements would be as follows:

  1. No prior timeliness penalties imposed for current year and four (4) prior years;
  2. The taxpayer has paid all current tax due, or is in a valid installment agreement;
  3. The taxpayer is otherwise compliant with FTB filing requirements

As you can see, the first-time California late-filing penalty abatement, as proposed, would be more restrictive than the Federal version, as it requires a slightly longer history of compliance.  It seems like California looks to the IRS for guidance in administration of its tax laws, and then tries to figure out how it can make things just a little bit tougher for California taxpayer.

Do You have Reasonable Cause?

image via gerdleonhard.typepad.com

Sticking your head in the sand and trying to ignore your IRS tax debt can be costly. The most obvious problem is penalties and interest, which causes the debt to increase with every passing day.

And it is not as easy as you might think to get the IRS to disregard (or “abate”) the penalties. The IRS will consider penalty abatements if the taxpayer is able to show reasonable cause; however, this is a pretty high standard when it comes to tax obligations. Reasonable cause exists when the taxpayer exercised ordinary business care, but still failed to comply with their tax obligation (i.e., usually filing and/or paying late).

In its analysis of “ordinary business care” the IRS is supposed to weigh all applicable facts and circumstances, including the following:

  • taxpayer’s reason for non-compliance
  • compliance history
  • length of time
  • circumstances beyond taxpayer’s control

Death, serious illness, and natural disasters are typically some of the strongest “excuses” for building a penalty abatement case. Forgetfulness is almost always a losing argument. Most of the time it makes more sense to seek tax relief through other channels because penalty abatement is often a dead end road.