IRS'S CRITERIA FOR RELIEF FROM PENALTIES

20.1.1.3 (02-22-2008)
Criteria for Relief From Penalties

Generally, relief from penalties falls into four separate categories:
*

Reasonable Cause
*

Statutory Exceptions
*

Administrative Waivers
*

Correction of Service Error

Appeals may recommend the abatement or non-assertion of a penalty based on these four criteria as well as "Hazards of Litigation."
3.

This chapter discusses each of these categories and the related criteria.
4.

In the interest of fairness, the IRS will consider requests for penalty relief received from third parties, including requests from representatives without an authorized power of attorney. While information may be accepted, NO taxpayer information may be discussed with a third party unless a valid power of attorney or other acceptable authorization is secured in writing from the taxpayer. See IRM 20.1.1.3.1#.
1.

If additional information is needed, contact the taxpayer or the taxpayers authorized representative.
2.

If the validity of the request is questionable, contact the taxpayer.
3.

In all cases involving third party requests for penalty relief, advise the taxpayer of the request and the action taken.

Reminder:

When penalty relief is warranted (including a determination not to assert a penalty that is otherwise warranted), a Penalty Reason Code (PRC) is required to indicate the reason a penalty is being removed or suppressed. See IRM 20.1.1.5.1, Master File Penalty Reason Codes. Also, See Exhibit 20.1.1-3, Penalty Reason Code Chart.

20.1.1.3.2 (12-11-2009)
Reasonable Cause

Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations.
2.

In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the IRC, Treasury Regulations (Treas. Regs.), Policy Statements, and IRM Part 20.1.
3.

Reasonable cause relief is not available for all penalties; however, other exceptions may apply.
1.

For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.
2.

If a reasonable cause provision applies only to a specific Code section, that reasonable cause provision will be discussed in the IRM 20.1 section relating to that specific IRC section. See Exhibit 20.1.1-2, Penalty Relief Application Chart.
3.

When considering the information provided in the following pages, remember that an acceptable explanation is not limited to those given in IRM 20.1, Penalty Handbook. Penalty relief may be warranted based on an "other acceptable explanation" , provided the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time. See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence.

The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM 20.1 sections for the rules that apply to a specific IRC section. See IRM 20.1.1.1.2 , Organization of IRM 20.1.
5.

Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this subsection:
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What happened and when did it happen?
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During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?
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How did the facts and circumstances result in the taxpayer not complying?
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How did the taxpayer handle the remainder of their affairs during this time?
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Once the facts and circumstances changed, what attempt did the taxpayer make to comply?

Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.

20.1.1.3.2.1 (12-11-2009)
Standards and Authorities

Any reason that establishes a taxpayer exercised ordinary business care and prudence but nevertheless failed to comply with the tax law may be considered for penalty relief.
2.

The following Treasury Regulations, under the Code of Federal Regulations (CFR), contain examples of circumstances that may be helpful in determining if a taxpayer has established reasonable cause:
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Accuracy-Related Penalty: Treas. Reg. 1.6664–4
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Failure to Pay Penalty: Treas. Reg. 301.6651–1(c)
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Failure to File Penalty: Treas. Reg. 301.6651–1(c)
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Failure to Deposit Penalty: Treas. Reg. 301.6656–1
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Information Returns Penalty: Treas. Reg. 301.6723–1A(d) and Treas. Reg. 301.6724–1
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Preparer/Promoter Penalties: Treas. Reg. 1.6694–2(d) and Treas. Reg. 301.6707–1T.

The following Internal Revenue Service Policy Statements contain specific criteria that may affect the imposition of penalties (see IRM 1.2.1, Servicewide Policies and Authorities - Policies of the Internal Revenue Service):
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Policy Statement 2–4, Penalties and interest not asserted against Federal agencies ( IRM 1.2.20.1.2)
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Policy Statement 2–7, Reasonable cause for late filing of return or failure to deposit or pay tax when due ( IRM 1.2.12.1.2)
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Policy Statement 2–9, Timely mailed returns bearing foreign postmarks to be accepted ( IRM 1.2.12.1.3)
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Policy Statement 2–11, Certain unsigned returns will be accepted for processing ( IRM 1.2.12.1.5)

20.1.1.3.2.2 (02-22-2008)
Ordinary Business Care and Prudence

Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that they exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law.
2.

In determining if the taxpayer exercised ordinary business care and prudence, review available information including the following:
1.

Taxpayer’s Reason: The taxpayer’s reason should address the penalty imposed. To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based. If the dates and explanations do not correspond to the events on which the penalties are based, request additional information from the taxpayer that may clarify the explanation ( See IRM 20.1.1.3.2 , Reasonable Cause).
2.

Compliance History: Check the preceding tax years (at least three) for payment patterns and the taxpayer’s overall compliance history. The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care. If this is the taxpayer’s first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for reasonable cause, since a first- time failure to comply does not by itself establish reasonable cause.
3.

Length of Time: Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance ( See IRM 20.1.1.3.2, Reasonable Cause). Consider: (1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer’s control, and (3) when the taxpayer complied with the law.
4.

Circumstances Beyond the Taxpayer’s Control: Consider whether or not the taxpayer could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to timely meet the tax obligation. The taxpayer’s obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late.

20.1.1.3.2.2.1 (12-11-2009)
Death, Serious Illness, or Unavoidable Absence

Death, serious illness, or unavoidable absence of the taxpayer may establish reasonable cause for filing, paying, or depositing late for the following:
1.

An individual: If there was a death, serious illness, or unavoidable absence of the taxpayer or a death or serious illness in the taxpayer’s immediate family (i.e. spouse, sibling, parents, grandparents, children).
2.

A corporation, estate, trust , etc.: If there was a death, serious illness, or other unavoidable absence of the taxpayer (person responsible), or a member of such taxpayer’s immediate family, and that taxpayer had sole authority to execute the return, make the deposit, or pay the tax.

If someone other than the taxpayer, or the person responsible, is authorized to meet the obligation, consider the reasons why that person did not meet the obligation when evaluating the request for relief. In the case of a business, if only one person was authorized, determine whether this was in keeping with ordinary business care and prudence.
3.

Information to consider when evaluating a request for penalty relief based on reasonable cause due to death, serious illness, or unavoidable absence includes, but is not limited to, the following:
1.

The relationship of the taxpayer to the other parties involved,
2.

The date of death,
3.

The dates, duration, and severity of illness,
4.

The dates and reasons for absence,
5.

How the event prevented compliance,
6.

If other business obligations were impaired, and
7.

If tax duties were attended to promptly when the illness passed, or within a reasonable period of time after a death or return from an unavoidable absence.

20.1.1.3.2.2.2 (12-11-2009)
Fire, Casualty, Natural Disaster, or Other Disturbance

Relief from a penalty may be requested if there was a failure to timely comply with a requirement to file a return or pay a tax as the result of a fire, casualty, natural disaster, or other disturbance. However, one of these circumstances by itself does not necessarily provide penalty relief.
2.

Penalty relief may be appropriate if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer’s control, they were unable to comply with the law.
3.

Factors to consider include:
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Timing
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Effect on the taxpayer’s business
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Steps taken to attempt to comply
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If the taxpayer complied when it became possible

The determination to grant relief from each penalty must be based on the facts and circumstances surrounding each individual case. Determine if the event resulted in a circumstance for which other penalty relief criteria may apply. For example, if the taxpayer was unable to access their records as the result of a fire, See IRM 20.1.1.3.2.2.3 , Unable to Obtain Records. If the taxpayer, or responsible party, was unable to comply because he or she was hospitalized as the result of an accident, See IRM 20.1.1.3.2.2.1 , Death, Serious Illness, or Unavoidable Absence .
5.

Determine if the taxpayer could not comply timely because the taxpayer was an "affected person" eligible for disaster relief as provided for in IRM 25.16.1.1, Disaster Assistance and Emergency Relief-Overview. Also See IRM 20.1.1.3.3.6, Official Disaster Area.

20.1.1.3.2.2.3 (12-11-2009)
Unable to Obtain Records

Explanations relating to the inability to obtain the necessary records may constitute reasonable cause in some instances, but may not in others.
2.

Consider the facts and circumstances relevant to each case and evaluate the request for penalty relief.
3.

If the taxpayer was unable to obtain records necessary to comply with a tax obligation, the taxpayer may or may not be able to establish reasonable cause. Reasonable cause may be established if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer’s control, they were unable to comply.
4.

Information to consider when evaluating such a request includes, but is not limited to, an explanation as to:
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Why the records were needed to comply,
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Why the records were unavailable and what steps were taken to secure the records,
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When and how the taxpayer became aware that they did not have the necessary records,
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If other means were explored to secure needed information,
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Why the taxpayer did not estimate the information,
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If the taxpayer contacted the IRS for instructions on what to do about missing information,
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If the taxpayer promptly complied once the missing information was received, and
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Supporting documentation such as copies of letters written and responses received in an effort to get the needed information.

20.1.1.3.2.2.4 (12-11-2009)
Mistake was Made

The taxpayer may try to establish reasonable cause by claiming that a mistake was made. Generally, this is not in keeping with the ordinary business care and prudence standard and does not provide a basis for reasonable cause.
2.

However, the reason for the mistake may be a supporting factor if additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply within the prescribed time.
3.

Information to consider when evaluating a request for an abatement or non-assertion of a penalty based on a mistake or a claim of ignorance of the law includes, but is not limited to:
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When and how the taxpayer became aware of the mistake,
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The extent to which the taxpayer corrected the mistake,
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The relationship between the taxpayer and the subordinate (if the taxpayer delegated the duty),
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If the taxpayer took timely steps to correct the failure after it was discovered, and
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The supporting documentation.

20.1.1.3.2.2.5 (12-11-2009)
Erroneous Advice or Reliance

Each request for penalty relief should be reviewed thoroughly to determine the exact basis of the taxpayer's request.
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Is the taxpayer claiming they did not comply due to specific advice they received from someone, whether orally or in writing, or
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Is the taxpayer claiming they relied on someone else to comply on their behalf?

Certain sections of the Internal Revenue Code and Treasury Regulations provide relief from certain penalties based on erroneous advice. See IRM 20.1.1.3.3.4., Advice , to first determine if a Statutory Exception or Administrative Waiver applies.
3.

If the taxpayer states they relied on written or oral advice from the Service but do not qualify for relief in accordance with the criteria in IRM 20.1.1.3.3.4.1, Written Advice from the IRS, or IRM 20.1.1.3.3.4.2, Oral Advice from the IRS, refer to IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence, to determine if the taxpayer exercised ordinary business care and prudence in relying on the Service's advice.
4.

The taxpayer may try to establish reasonable cause by claiming they relied on another party to comply on their behalf or that another party provided erroneous advice. Generally, this is not a basis for reasonable cause, particularly for filing or paying obligations, since the taxpayer is responsible for meeting their tax obligations and that responsibility cannot be delegated. However, other factors to consider include:
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Was the taxpayer unable to comply because they did not have access to their own records? See IRM 20.1.1.3.2.2.3 , Unable to Obtain Records.
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Was the failure to comply due to a change in the tax law the taxpayer could not reasonably be expected to know? See IRM 20.1.1.3.2.2.6, Ignorance of the Law.

Consider all facts and circumstances presented by the taxpayer to determine if, despite the exercise of ordinary business care and prudence, the taxpayer nevertheless was unable to comply.

20.1.1.3.2.2.6 (02-22-2008)
Ignorance of the Law

In some instances taxpayers may not be aware of specific obligations to file and/or pay taxes. The ordinary business care and prudence standard requires that taxpayers make reasonable efforts to determine their tax obligations.
2.

Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances. For example, consider:
1.

The taxpayer’s education,
2.

If the taxpayer has previously been subject to the tax,
3.

If the taxpayer has been penalized before,
4.

If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know, and
5.

The level of complexity of a tax or compliance issue.

Reasonable cause should never be presumed, even in cases where ignorance of the law is claimed.
4.

The taxpayer may have reasonable cause for noncompliance due to ignorance of the law if:
1.

A reasonable and good faith effort was made to comply with the law, or
2.

The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement.

See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence.

20.1.1.3.2.2.7 (02-22-2008)
Forgetfulness

The taxpayer may try to establish reasonable cause by claiming forgetfulness or an oversight by the taxpayer, or another party, caused the noncompliance. Generally, this is not in keeping with the ordinary business care and prudence standard and does not provide a basis for reasonable cause. If the taxpayer claims forgetfulness or an oversight by another party, consider the following:
1.

Relying on another person to perform a required act is generally not sufficient for establishing reasonable cause.
2.

It is the taxpayer’s responsibility to file a timely return and to make timely deposits or payments. This responsibility cannot be delegated.

See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence.

20.1.1.3.3 (02-22-2008)
Statutory Exceptions and Administrative Waivers

These two very separate categories are placed together because in many instances an Administrative Waiver is an extension of rules that were provided for by statute.

20.1.1.3.3.1 (12-11-2009)
Statutory and Regulatory Exceptions

Tax legislation may provide an exception to a penalty. Specific statutory exceptions can be found in either the penalty-related IRC section(s) or the accompanying regulation(s). For example:
IRC Section(s) Title IRM
IRC 6654(e)(1), (2), or (3) Estimated Tax Penalties (ES) IRM 20.1.3
IRC 7502(a) and IRC 7502(e) Timely Mailing Treated as Timely Filing and Paying IRM 20.1.2 and IRM 20.1.4
IRC 6724(a) or IRC 6724(c) Waiver; Definitions and Special Rules, Information Return Penalties IRM 20.1.7
IRC 6404(f) Abatement of any Penalty or Addition to Tax Attributable to Erroneous Written Advice by the Internal Revenue Service See IRM 20.1.1.3.3.4.1
IRC 7508 Time for performing certain Acts Postponed by Reason of Service in Combat Zone. This provision applies only in a Presidentially-declared "Combat Zone" IRM 25.16, Disaster Assistance and Emergency Relief
IRC 7508A Authority to Postpone Certain Deadlines by Reason of Presidentially Declared Disaster or Terroristic or Military Actions IRM 25.16, Disaster Assistance and Emergency Relief

Legislation with retroactive provisions may provide guidance on associated penalties. As a result of that retroactive provision, the IRS may issue a News Release or other guidance with instructions for the disposition of the related penalties.
3.

IRC section 6205 provides for an interest-free adjustment when an employer underreported and underpaid certain employment taxes if specific conditions are met by the employer to report the error and pay the tax due. However, IRC section 6205 and related Treasury Regulations are silent in regard to penalties. Consequently, IRS extended an Administrative Waiver to certain penalties. See IRM 20.1.1.3.3.2, Administrative Waivers.

Effective Jan. 1, 2009, Treas. Reg. 31.6205–1 and Treas. Reg. 31.6302–1 have been amended for qualified interest-free adjustments. When all conditions have been met for an employer to qualify for an interest-free adjustment, "the amount timely paid will be deemed to have been timely deposited by the employer. " In other words, "tax deemed to have been timely deposited " is not subject to the Failure to Deposit (FTD), Failure to Pay (FTP), and Failure to File (FTF) penalties. See IRM 21.7.2.5, Adjusted Employer's Federal Tax Return or Claim for Refund, IRM 20.1.2, Failure to File/Failure to Pay Penalties, and IRM 20.1.4, Failure to Deposit Penalty, for required procedures and additional information.

When all regulatory requirements have been met for the amount paid to be considered timely deposited by the employer, penalties should not be assessed. If penalties were assessed, the account must be carefully reviewed to determine if penalty relief is appropriate and, if so, the correct reason for relief. Did the taxpayer state s/he met all requirements for an interest-free adjustment?
1.

If the adjustment was input with TC 290, see IRM 21.7.2.5, Adjusted Employer's Federal Tax Return or Claim for Refund, to determine if reversal of the TC 290 and reassessment with TC 298 is appropriate. If so and manual penalty reversal is required (Master File will automatically reverse systemic penalty assessments), use Penalty Reason Code (PRC) 044.
2.

If the adjustment was input with TC 298, determine if IRS asserted the penalty(s) incorrectly. If so, refer to IRM 20.1.1.3.4, Correction of Service Error. If not, explain the reason for the penalty(s) to the taxpayer.
3.

If the taxpayer did not meet all requirements for an interest-free adjustment and established they were unable to comply timely due to reasonable cause (refer to IRM 20.1.1.3.2, Reasonable Cause), use the appropriate PRC for penalty abatement (refer to Exhibit 20.1.1–3, Penalty Reason Code Chart).

20.1.1.3.3.2 (12-11-2009)
Administrative Waiver

The IRS may formally interpret or clarify a provision to provide administrative relief from a penalty that would otherwise be assessed. An administrative waiver may be addressed in either a Policy Statement, News Release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions.
2.

An administrative waiver may be necessary when there is a delay by the IRS in:
*

Printing or mailing of forms,
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Publishing guidance (e.g. writing of Regulations), or
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Other conditions.

An example of an administrative waiver is Notice 93–22, 1993-1 C.B. 305. This allowed individuals who requested an automatic four-month extension of time to file an income tax return, an extension of time without remitting the unpaid amount of any tax properly estimated to be due. See Treas. Reg. 1.6081–4.
4.

IRC section 6205 addresses the waiving of interest if a tax error is corrected by an employer during the same period in which it is ascertained, provided the payment of the tax assessment is made no later than the due date of the tax return period in which the error was discovered. The waiver applies if the taxpayer has not previously been informed that they underreported their employment taxes. IRS has established an Administrative Waiver to extend the provision of IRC section 6205 to certain penalties for which the code section is silent.
Note:

While IRC section 6205 has not been updated to extend the provision to certain penalties, Treas. Reg. 31.6205–1 and Treas. Reg. 31.6302–1 have been amended to extend the provision to certain penalties for errors discovered on or after Jan. 1, 2009. See IRM 20.1.1.3.3.1, Statutory and Regulatory Exceptions, for penalty information related to interest-free adjustments for employment taxes for errors discovered on or after Jan. 1, 2009.

For errors that are discovered prior to Jan. 1, 2009, the following action will be taken to meet the IRS’s responsibility to provide fair and consistent treatment to taxpayers:
1.

For an increase of tax that qualifies for an interest-free adjustment, the IRS will not assess Failure to File (TC 16X), Failure to Pay (TC 27X) or Failure to Deposit (TC 18X) penalties; provided the tax increase is paid by the due date of the tax period in which additional tax was ascertained.
Note:

If there’s a previously assessed TC 16X, on the tax period, it may be necessary to restrict the Failure to File penalty by entering a TC 160 .00 on the adjustment.

The tax adjustment will be represented by a TC 298/308, with an interest computation date.
3.

If one of the previously identified penalties has been assessed and a request for abatement is received, the abatement will be done as an Administrative Waiver if the penalty is based on the TC 298/308 tax increase (provided the tax increase was paid by the due date of the tax period in which it was ascertained).

20.1.1.3.3.3 (12-11-2009)
Undue Hardship

An undue hardship may support the granting of an extension of time for paying a tax or deficiency (Form 1127, Application for Extension of Time for Payment of Tax). Treas. Reg. 1.6161–1(b), provides that an undue hardship must be more than an inconvenience to the taxpayer. The taxpayer must show that they would sustain a substantial financial loss if forced to pay a tax or deficiency on the due date.
2.

The extension of time to pay does not provide the taxpayer with an extension of time to file. Nor does the extension of time to pay relieve the taxpayer of any appropriate penalties (see IRM 20.1.2.1.9).
3.

Undue hardship generally does not affect a person’s ability to file and therefore would not provide a basis for penalty relief in a failure to file situation. However, each request must be considered on a case-by-case basis. Undue hardship may establish reasonable cause for failure to file on magnetic media, under Treas. Reg. 301.6724–1. See IRM 20.1.7, Information Return Penalties.
4.

Undue hardship may also support relief from the addition to tax for failure to pay tax if the explanation for the noncompliance supports such a determination. However, the mere inability to pay does not ordinarily provide the basis for granting penalty relief. Under Treas. Reg. 301.6651–1(c), the taxpayer must also show that they exercised ordinary business care and prudence in providing for the payment of the tax liability.
1.

The taxpayer may claim that enough funds were on hand, but as a result of unanticipated events, the taxpayer was unable to pay the taxes.
2.

Consider an individual taxpayer’s inability to pay a factor when considering penalty relief if the taxpayer shows that, had the payment been made on the payment due date, undue hardship (as defined in Treas. Reg. 1.6161–1(b)) would have resulted. In the case where a taxpayer files bankruptcy, consider inability to pay a factor if the insolvency occurred before the tax payment due date.

If a payroll was met, taxes were withheld and should be available for deposit. Employers must reserve money withheld from employees’ wages in trust until deposited. The employer should not use the money for any other purpose. Undue hardship does not support relief from the IRC section 6672, Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax (Trust Fund Recovery Program).
6.

Information to consider when evaluating a request for penalty relief includes, but is not limited to, the following:
*

When did the taxpayer know they could not pay?
*

Why was the taxpayer unable to pay?
*

Did the taxpayer explore other means to secure the necessary funds?
*

What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements?
*

Did the taxpayer pay when the funds became available?

See Exhibit 20.1.1-3, Penalty Reason Code Chart.

20.1.1.3.3.4 (12-11-2009)
Advice

This section discusses three basic types of advice that may qualify for Statutory, Regulatory, or Administrative penalty relief:
1.

Written advice provided by IRS
2.

Oral advice provided by IRS
3.

Advice provided by a tax professional

Information to consider when evaluating a request for abatement or non-assertion of a penalty due to reliance on advice includes, but is not limited to, the following:
1.

Was the advice in response to a specific request and was the advice received related to the facts contained in that request?
2.

Did the taxpayer reasonably rely on the advice?

The following instances address some situations where penalty relief may not be appropriate even though the taxpayer relied on written advice from the IRS regarding an item on a filed return:
1.

The taxpayer did not reasonably rely on the advice regarding an item included on a return if the advice was received after the date the return was filed;
Note:

A taxpayer may be considered to have reasonably relied on advice received after the return was filed if they then filed an amended return that conformed with such written advice.

A taxpayer may not be considered to have reasonably relied on written advice unrelated to an item included on a return, such as advice on the payment of estimated taxes, if the advice is received after the estimated tax payment was due.

Did the taxpayer, or their authorized representative, provide the IRS or the tax professional with adequate and accurate information?
5.

The taxpayer is entitled to penalty relief for the period during which they relied on the advice. The period continues until the taxpayer is placed on notice that the advice is no longer correct or no longer represents the Service’s position.
6.

The taxpayer is placed on notice as the result of any of the following events that present a contrary position and occur after the issuance of the written advice:
1.

Written correspondence from the IRS that its advice is no longer correct or no longer represents the IRS’s position,
2.

Enactment of legislation or ratification of a tax treaty,
3.

A U.S. Supreme Court decision,
4.

The issuance of temporary or final regulations, or
5.

The publication of a revenue ruling, revenue procedure, or other statement in the Internal Revenue Bulletin.

Generally, Form 843, Claim for Refund and Request for Abatement, is required to be filed to request penalty abatement based on erroneous written advice by the IRS. However, if Form 843 is not filed and the information provided demonstrates that abatement of the penalty is warranted, the penalty should be abated, whether or not a Form 843 is provided. Information required to be provided includes:
1.

The taxpayer's written request for advice,
2.

The erroneous written advice furnished by the Service to the taxpayer and relied on by the taxpayer, and
3.

The report (if any) of tax adjustments that identifies the penalty or addition to tax and the item relating to the erroneous written advice.

20.1.1.3.3.4.1 (02-22-2008)
Written Advice from the IRS

The IRS is required by IRC section 6404(f) and Treas. Reg. 301.6404–3 to abate any portion of any penalty attributable to erroneous written advice furnished by an officer or employee of the IRS acting in their official capacity.
2.

If the taxpayer does not meet the criteria for penalty relief under IRC section 6404(f), the taxpayer may qualify for other penalty relief. For instance, taxpayers who fail to meet all of the above criteria may still qualify for relief under reasonable cause if the IRS determines that the taxpayer exercised ordinary business care and prudence in relying on the IRS’s written advice. See IRM 20.1.1.3.2.2.5 - Erroneous Advice or Reliance .
3.

Requests that qualify for penalty relief based on erroneous written advice from the IRS under IRC section 6404(f) must be filed:
1.

Within the period allowed for collection of the penalty or addition to tax, or
2.

If the penalty or addition to tax has been paid, within the period allowed for claiming a credit or refund of such penalty or addition to tax.

20.1.1.3.3.4.2 (12-11-2009)
Oral Advice from IRS

The IRS may provide penalty relief based on a taxpayer’s reliance on erroneous oral advice from the IRS. The IRS is required by IRC section 6404(f) and Treas. Reg. 301.6404–3 to abate any portion of any penalty attributable to erroneously written advice furnished by an employee acting in their official capacity. Administratively, the IRS has extended this relief to include erroneous oral advice when appropriate.
2.

In addition to considering the criteria provided in Treas. Reg. 301.6404–3 and IRM 20.1.1.3.3.4, Advice, and IRM 20.1.1.3.3.4.1, Written Advice From the IRS, consider the following:
1.

Did the taxpayer exercise ordinary business care and prudence in relying on that advice?
2.

Was there a clear relationship between the taxpayer’s situation, the advice provided, and the penalty assessed?
3.

What is the taxpayer’s prior tax history and prior experience with the tax requirements?
4.

Did the IRS provide correct information by other means (such as tax forms and publications)?
5.

What type of supporting documentation is available?

The following is supporting documentation:
1.

A notation of the taxpayer’s question to the IRS,
2.

Documentation regarding the advice provided by the IRS,
3.

Information regarding the office and method by which the advice was obtained,
4.

The date the advice was provided, and
5.

The name of the employee who provided the information.

20.1.1.3.3.4.3 (12-11-2009)
Advice from a Tax Advisor

Reliance on the advice of a tax advisor generally relates to the reasonable cause exception in IRC section 6664(c) for the accuracy-related penalty under IRC section 6662 . See IRM 20.1.5, Return Related Penalties, and Treas. Reg. 1.6664–4(c).
2.

However, in very limited instances, reliance on the advice of a tax advisor may provide relief from other penalties when the tax advisor provides advice on a substantive tax issue.
Example:

The employer researched all available IRS publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were "contract labor" or "employees " . As a result, the tax advisor advised the employer that the workers were "contract labor" . However, the IRS later determined that the workers were "employees" and not " contract labor" .

Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer’s responsibility to file, pay, or deposit taxes cannot be excused by reliance on the advice of a tax advisor.
4.

Because the IRC and Treasury Regulations sections that provide penalty relief criteria for erroneous advice from a tax advisor is generally limited to the accuracy-related penalty, penalty relief from other penalties must meet the reasonable cause standards. See IRM 20.1.1.3.2, Reasonable Cause.

IRS'S CRITERIA FOR RELIEF FROM PENALTIES

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