How to Understand, Mitigate, and Defend Tax Penalties

In September, about 17.6 million tax returns were still awaiting processing, and the IRS expects to receive over 4 million more in October. The delay has left many taxpayers frustrated, especially those grappling with error notices and being charged penalties and interest for alleged mistakes. Those penalties add up. For the fiscal year 2020, the IRS assessed nearly $31.4 billion in civil penalties. But are those penalties fair? Are there claims or defenses that can help taxpayers avoid those penalties?

There’s a lot that can go wrong while filing a tax return because the tax code is so huge and increasingly complicated. How can taxpayers seek accessible tax advice, and even defend tax penalty notices if necessary?

On today’s episode of the Taxgirl podcast, Kelly is joined by Andrew Gradman to chat about the general scope of tax penalties and what taxpayers can do about them, both proactively and retroactively. Andrew is a Los Angeles tax lawyer specializing in transactional matters. He’s the principal at the Law Office of Andrew L. Gradman. He received his BA from Stanford University, his JD from Columbia University, and his Tax LLM and Business Certificate from NYU. He is admitted to the bar in California and Nevada.

Listen to Kelly and Andrew talk about tax penalties:

One tax penalty taxpayers are most likely familiar with is IRC 6662, an accuracy-related penalty. Andrew explains what the details mean and why it exists. He says, “Penalties are the heart of the tax law.”
You don’t need intent to face a tax penalty like IRC 6662, which is sometimes referred to as a “strict liability penalties.” Why is that rule in place, and how can taxpayers stay on top of these standards? It all comes down to reasonable cause and good faith. The big problems are negligence and disregard of rules and regulations.
How does negligence apply to taxes? What counts as negligent tax behavior? What are some examples of tax negligence? Andrew explains in plain English that in general, negligence is “a failure to make a reasonable attempt to meet the Internal Revenue laws.” It can also include failure to keep adequate books and records.
If a taxpayer receives a notice for a tax penalty, what can be done about it? If an individual feels the notice isn’t “fair,” what options are available to them? Many penalties can be defeated by “reasonable cause” and “good faith,” though some strict-liability penalties are harder to fight.
Since the FAQ section of the IRS website is notoriously not binding authority, how can taxpayers reasonably inform themselves and arm themselves against tax penalties?
How can taxpayers prove reasonable cause and good faith in defense of tax penalties? What resources are available during the process? What does “substantial authority” mean in tax law?
When there is a mistake when filing, who’s responsible? Is it the individual, or is it the preparer? What happens next? Andrew says it depends on contracts, courtesy, and (unfortunately sometimes) malpractice.
Sometimes clients don’t know that relevant and important information is, in fact, relevant and important when it comes to their tax return, which can lead to an error or penalty down the road. Plus, bad tax advice has never been more abundant than it is now in the age of TikTok and viral media. What is Andrew’s advice for finding good and accessible tax advice?
When people have access to a tax professional, how candid can they be? What information is necessary to disclose, including bad information or advice they may have heard?
It can feel overwhelming to receive a tax penalty notice. Staying informed and having tax professionals in your corner will give you the tools and empowerment to take a breath and solve the problem.

NOTE: On October 15, 2021, after this episode was taped and aired, the IRS *finally* issued a statement about FAQs and penalties. Specifically, “To address concerns about the potential application of penalties to taxpayers who rely on an FAQ, the IRS is today releasing a statement clarifying that if a taxpayer relies on any FAQ (including FAQs released before today) in good faith and that reliance is reasonable, the taxpayer will have a “reasonable cause” defense against any negligence penalty or other accuracy-related penalty if it turns out the FAQ is not a correct statement of the law as applied to the taxpayer’s particular facts.” You can find out more here.

More about Kelly:

Kelly is the creator and host of the Taxgirl podcast series. Kelly is a practicing tax attorney with considerable experience and knowledge. She works with taxpayers like you every day. One of the things that she does is help folks out of tax jams and, hopefully, keep others from getting into them.

You can find out more about Kelly here, and you can follow her on Twitter, Facebook, Instagram, and LinkedIn.

To subscribe to the podcast (it’s free!) using Apple, Spotify, or your favorite listening app, click here.

How to Understand, Mitigate, and Defend Tax Penalties

There’s a lot that can go wrong while filing a tax return because the tax code is so huge and increasingly complicated. How can taxpayers seek accessible tax advice, and even defend tax penalty notices if necessary?

More about Kelly:

Links:

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