If taxpayers and tax preparers are thinking that the IRS might grant universal tax penalty relief due to the COVID-19 pandemic, the IRS commissioner threw a wet blanket over that hope or expectation. Nevertheless, there are tax penalty defenses available that may help taxpayers headed for the IRS’s penalty box.
The defenses; while they can be helpful, there’s also no guarantee they’ll work in every case.
“We get it that you would like to have blanket relief. It is not going to happen, and I think if you were sitting in my chair or Chief Counsel Mike Desmond’s chair or others’ chairs, you would be able to look at it as we do,” IRS Commissioner Charles Rettig said in remarks to an American Institute of Certified Public Accounts (AICPA) online meeting in the days following the Nov. 6 presidential election.
With the arrival of a new administration, it was thought that there might be a change in the IRS’s approach. However, Commissioner Rettig continues to run the IRS, and no blanket relief has been announced.
The question emerged last summer, while the Trump administration was still in power. The AICPA sent a letter to the IRS asking for broader penalty relief. A news release on the letter said, in part, “AICPA believes it is both necessary and appropriate to provide further compliance relief to those taxpayers that are truly impacted by the coronavirus and do not have the wherewithal to continue to voluntarily meet their tax obligation.”
The AICPA’s requests were:
“The AICPA recommends the IRS automatically waive penalties for the 2019 tax year through the extended filing deadline for all taxpayers. Additionally, AICPA asks that the IRS reassess the impact of the coronavirus during 2021 and determine the appropriateness of offering similar penalty relief for the 2020 tax year."
Rather than embrace the AICPA’s proposals, Rettig said that the IRS is focusing on working with taxpayers on their reasonable cause defenses for late payments, and first-time penalty abatement. Reasonable cause defenses are what the IRS considers when businesses used “all ordinary business care” in trying – but failing – to meet federal tax obligations. Facts the IRS uses to determine reasonable cause are:
- What happened and when did it happen?
- What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file and/or pay your taxes timely?
- How did the facts and circumstances affect your ability to file and/or pay your taxes or perform your other day-to-day responsibilities?
- Once the facts and circumstances changed, what actions did you take to file and/or pay your taxes?
- In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment? (More information is available at the IRS’s website page on reasonable cause.)
First-time penalty abatement is considered in these situations, says the IRS:
- You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
- You filed all currently required returns or filed an extension of time to file.
- You have paid, or arranged to pay, any tax due. (More information is available at the IRS's penalty waiver abatement page.)
There’s no way to know if the IRS’s stance on broader waivers will change. There have certainly been multiple revisions in federal tax policy since COVID-19’s arrival, and more relief could come; however, the federal government is in a serious, if not critical, financial condition, given the burgeoning size of the national debt and annual deficits.
Therefore, the best approach is to not hope for what might not come, but to take advantage of the options now available. If you can.
Every tax situation is different, but we are here to help. If you have questions, contact your tax advisor today. The professionals at Rodefer Moss can help you maximize your tax benefits while remaining compliant with the latest tax law.