Protesting penalties asserted by the Service Center.

Clients routinely receive notices from IRS Service Centers. It is not unusual for these notices to assert penalties, such as those for failures to file or pay. Other common penalties include additions to tax for not making timely deposits of payroll taxes and not using the Electronic Federal Tax Payments System for making payments. Penalties are sometimes also proposed for not filing information returns in a timely manner or not filing forms through the use of magnetic media.

On receipt of these notices, many clients tend to pay the assessments without considering whether the penalties are applicable in the first instance. However, sometimes the assessments are not correct or .the penalties are not warranted due to reasonable cause.

Clients should contact their CPAs on receipt of notices from the Service. When a client receives a penalty notice and it is determined that the penalty may not be warranted or has been incorrectly computed, the CPA should obtain a Form 2848, Power of Attorney and Declaration of Representative, authorizing representation before the IRS for the matter at hand. A letter should then be sent to the Service Center carefully and fully explaining the facts and circumstances, citing applicable Code sections, regulations, caselaw and IRS guidance or policies, and requesting abatement of the penalty. Many sections of the Code that impose penalties generally provide for no such additions if failure to timely comply was due to reasonable cause and not willful neglect. The "Internal Revenue Manual Penalty Handbook" the procedural book of the Service, beginning at IRM [120.1] 1.3, provides guidelines for relief from penalties. The Handbook discusses the guidelines for relief due to reasonable cause, statutory exceptions, administrative waivers and correction of IRS error.

If the abatement request is denied, the Service Center will send a notice explaining the reasons for denial and requesting payment of the assessment. The notice will also advise that, if the representative still believes the penalty is not warranted, a statement of facts and position should be sent to the Penalty Appeals Coordinator at the Service Center. This statement should request that, if the abatement request is denied by the Coordinator, the matter should be referred to the Appeals Office.

If the Coordinator will not abate the penalty, the file is transferred to the Appeals Office closest to the Service Center. An Appeals Officer will phone the representative and discuss the issues. Appeals may sustain the penalty or recommend abatement in full or in part. The mission of Appeals is to fairly resolve issues, and it has the authority to do so on an intermediate basis. Thus, the penalty amount, if not fully abated, may be partially reduced. If the penalty is not abated to the taxpayer's satisfaction, the amount must be paid and a claim for refund filed to seek relief through the usual administrative channels and, if necessary and appropriate, the courts.

FROM JOE MARCHBEIN, CPA, RBG & Co., LLP, ST. Louis, MO