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TIGTA Report Weighs in on Penalty Abatements

By Michael A. Villa, Jr. on August 28, 2015

On July 30, 2015, the Treasury Inspector General for Tax Administration (“TIGTA”) released a report evaluating whether penalties assessed by the IRS against taxpayers are being abated in accordance with IRS Appeals criteria. The report underscores the need for skilled advocacy when it comes to penalty abatement requests and the importance of ensuring that taxpayers’ requests for penalty abatements both comply with the governing standards of penalty relief and contain sufficient information to justify the relief requested. 

TIGTA concluded “that 59 of 140 sampled penalty appeal cases were not abated in accordance with Appeals criteria because operating divisions had not denied the abatement or because case files did not support the abatement. Based on these results, TIGTA estimates that in Fiscal Year 2013, 1,411 penalty appeal cases and more than $39 million in penalty abatements did not comply with Appeals criteria.”

In 57 of the cases reviewed, TIGTA was unable to determine what factors Appeals considered to abate the penalties.  TIGTA cited examples in which Appeals abated penalties due to the hazards of litigation, but TIGTA could not locate documentation in the files outlining the alleged hazards of litigation. 

TIGTA also identified internal control weaknesses that might be strengthened in order to review abatement decisions to ensure that the abatements are appropriate.  For example, TIGTA described four cases in which more than $580,000 in penalties had been abated without managerial approval.  TIGTA noted that the abatements did not violate IRS policy because the authority to abate unlimited penalty amounts without managerial approval is delegated to the Appeals Officers.  TIGTA questioned whether the lack of consistent managerial review creates a high level of risk for improper abatements of substantial dollar amounts.

TIGTA recommended that the IRS provide more training to Appeals personnel regarding the criteria for documenting the reasons for abatements and to review whether modifications are warranted to address unlimited abatements without managerial approval.  The IRS agreed with the recommendations.  TIGTA submits that the above recommendations will assist in applying consistent methodology when deciding whether or not to abate penalties. 

However, these authors note that the additional documentation requirements and/or potential managerial review may create additional hurdles for taxpayers and their advocates to consider when handling penalty abatement requests.  Whether or not TIGTA’s recommendations will impede or hinder future penalty abatement requests remains to be seen, but practitioners should note that Appeals will likely be requesting additional detailed documentation on arguments and facts in order to justify the abatement. 

TIGTA’s full report can be found at: https://www.treasury.gov/tigta/auditreports/2015reports/201510059fr.pdf.