Template for requesting penalty abatement available from AICPA

By Alistair M. Nevius, J.D.
Updated: 

In response to the global COVID-19 pandemic, the IRS took unprecedented actions this year to extend a wide variety of filing and payment deadlines. With offices across the country shut down, quarantines and shutdowns in effect, and many people sick, taxpayers and tax practitioners both needed the extra time.

However, as the pandemic unfolded and lives were disrupted, the AICPA heard from members about a range of problems they were experiencing, including the extra time spent with economically challenged clients; unexpected deadlines due to assisting with Paycheck Protection Program (PPP) loan applications and the PPP loan forgiveness process; and clients, members, and staff being incapacitated with COVID-19. Members report that information was harder to acquire, systems and services were limited, and normal processes were not feasible. As a result, more extensions were filed, returns were completed closer to the final deadlines, and some returns were not able to be filed timely with accuracy. This potentially translates into more notices and penalties being assessed.

Throughout the pandemic, the AICPA has been communicating its concerns to Treasury and the IRS about practitioners’ ability to meet various filing and payment deadlines. As part of those efforts, in early July, the AICPA started advocating for relief for taxpayers and their advisers who have been affected by COVID-19 in an unprecedented year. Specifically, the AICPA urged the IRS to automatically waive failure-to-file and failure-to-pay penalties for the millions of taxpayers affected and working through the challenges created by the coronavirus.

Additionally, the AICPA urged the IRS to set up an expedited process to help taxpayers establish or revise an installment agreement, based on current financial circumstances, to be able to more easily comply with their tax obligations. Finally, the AICPA asked the IRS to delay collection activities because of the backlog they are experiencing in processing mail and the effect that backlog could possibly have on the currency of a particular taxpayer’s account information.

Based on its discussions with the IRS in September, the AICPA understood that the IRS would be willing to work with taxpayers who need relief. Practitioners who made a good-faith effort to meet filing deadlines on behalf of their clients, but were unable to do so due to COVID-19, should write “COVID-19” in an attachment to the return, briefly describing the reason they could not meet the deadlines, or, if possible, should write “COVID-19” at the top of the tax return to indicate the need for penalty relief. While this approach is not a guaranteed method for relief, it may be the starting point for a reasonable-cause request and establishes that the taxpayer disclosed their circumstances in advance.

Unfortunately, the AICPA is now hearing from members that clients for whom they sought “COVID-19” relief shortly after Sept. 15 are now receiving late-filing notices. The AICPA is in discussions with the IRS about this situation and has requested systemic abatement of late-filing penalties for those affected by the coronavirus. However, at this time there is no automated process for COVID-19 penalty relief, and each taxpayer's case must be considered on its own merits.

The IRS first-time penalty abatement is a solution for many taxpayers who have never found themselves in this situation and do not anticipate a need to reserve the benefit for an upcoming issue. However, every taxpayer is entitled to request abatement of penalties if they have a reasonable cause for filing or paying late. Considering the incredible amount of unforeseen circumstances encountered by everyone this year, a request for reasonable-cause penalty abatement may be the best starting point.

The AICPA has a template for practitioners to use to request a reasonable-cause penalty abatement on behalf of their clients. The template is available free to AICPA members.

UPDATE: In response to the unique aspects of the pandemic, the AICPA has created a custom penalty abatement letter for members to use as a starting point for relief. The template is available free to AICPA members.

Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor in chief.

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