1. Read the requirements (Code and Regulations) for penalty imposition.

  • Did the taxpayer do it?
  • What general exceptions apply?

2. What does the IRM say?
3. Where is the burden of proof and burden of production?
4. If multiple penalties/periods – is the penalty divisible?
5. If the penalty is based on underlying income tax, can the underlying tax be reduced?
6. If the underlying tax can be reduced enough, will the penalty still apply (e.g. substantial understatement)?
7. If the underlying tax can be reduced, has the statute of limitations expired on assessment (e.g. eliminating substantial understatement of tax penalty, due to less tax due, can change the statute on assessment from six years to three)?
8. Does “first time” abatement apply?
9. Are penalties being improperly stacked?
10. Does the reasonable cause exception apply? See IRM Section 20 for the nine main reasonable cause arguments.

  • Death, Serious Illness, Unavoidable Absence
  • Fire, Casualty, Natural Disaster
  • Unable to Obtain Records
  • Mistake was made
  • Erroneous Advice or Reliance
  • Written/Oral Advice from the IRS
  • Ignorance of Tax Laws
  • Reasonable Cause/Ordinary Business Care and Prudence
  • Undue Economic Hardship

11. If reasonable cause arguments may apply, will arguing it interfere with attorney/client-tax preparer/client privilege?
12. Is it a Title 26 or Title 31 penalty?

  • Who collects the penalty and how?
  • Consider impact on how to proceed.

13. Is it a penalty or an excise tax?
14. Is the penalty dischargable in bankruptcy? Does it need to be fought to aid in obtaining a bankruptcy discharge in the future?
15. Will the penalty interfere with obtaining an offer in compromise-doubt as to collectability?
16. When do you fight the penalty? Address it at audit/collection level or wait for appeal?
Are some better argued as part of a collection due process appeal if no prior opportunities to challenge?

  • Is the argument purely legal, based on interpretation of already provided facts, or based on additional facts?

17. Is the amount of underlying tax so high that even if you prevail on penalty it will not matter?
18. Always consider criminal potential.

  • Will fighting the penalty increase the risk of opening new or additional criminal issues?
  • Will fighting the penalty “encourage” the taxpayer to commit perjury or knowingly make a false statement to the Government?

19. Will fighting the penalty open up additional (civil) issues?
20. Will the penalty effect other issues, such as state tax issues?

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