For tax matters, we rely on experts. At times that expert is a CPA, local tax attorney, or tax preparer. However, in other instances that expert can also be an IRS representative, and just like any human being, IRS representatives make mistakes. The good thing is that taxpayers who rely on erroneous IRS counsel can seek relief from consequent tax penalties.
The Internal Revenue Code (IRC) provides recourse to the taxpayer who incurs a tax penalty or additional tax attributable to erroneous advice given by an IRS officer or employee acting in their official capacity. The Internal Revenue Code requires the IRS to abate a portion of the penalty or additional tax due to the incorrect advice given to the taxpayer (IRC § 6404(f)). However, the IRS is not required to reduce the penalty and the additional tax unless:
- The IRS officer’s advice was in writing, and the taxpayer reasonably relied on it.
- The written advice was in response to the taxpayer’s written request.
- The taxpayer provided adequate and accurate information to the IRS.
Advice and Reliance
The tax penalty abatement due to erroneous IRS advice provided for in the Internal Revenue Code speaks of “advice” upon which the taxpayer relied; but what qualifies as “advice”? The regulation defines advice as a written response from the IRS that applies tax laws to the specific facts that the taxpayer submitted in writing. It also states a conclusion about the tax treatment to be accorded the taxpayer upon applying the tax law to those facts.
Since the IRC requires that the advice should be “written,” the provision on abatement will not apply to a piece of erroneous advice that an IRS officer or employee gave in a phone conversation.
One requirement for the IRS to abate a penalty or additional tax is that the taxpayer must have reasonably relied on the advice from the IRS officer or employee. How can we say that the taxpayer’s reliance on the advice is reasonable? For the reliance to be considered reasonable, the taxpayer must have received the advice before a return is filed and the advice must not relate to a tax return before the occurrence of the act or omission.
For advice concerning an ongoing set of actions, the taxpayer may reasonably rely on the advice until a notice of a change in position is given to him. The notice can be given to a taxpayer in the following forms:
- Correspondence from the IRS stating that the advice is no longer its position
- Enactment of legislation or a treaty
- A Supreme Court decision
- Issuance of temporary or final regulations
- Revenue ruling, revenue procedure, or other statements published in the Internal Revenue Bulletin.
Requesting Tax Penalty Abatement
A taxpayer who wants to request abatement of a portion of the penalty or additional tax he incurred must file a claim of abatement by submitting Form 843 with the documents required by Regulations Section 301.6404-3(d) during the collection period for the penalty or during the claim for refund period for paid penalties.