Proactive Accounting & Tax Services IRS

Secrets to IRS Penalty Forgiveness Using Reasonable Cause

The IRS can waive penalties it assessed against you or your business if there was “reasonable cause” for your actions.

The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:

  1. Filing of returns
  2. Payment of tax
  3. Accuracy of information

Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.

Here are three instances where you might qualify for reasonable cause relief:

  1. Your or an immediate family member’s death or serious illness, or your unavoidable absence
  2. Inability to obtain necessary records to comply with your tax obligation
  3. Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance

Here are five instances where you likely do not qualify for reasonable cause penalty relief:

  1. You made a mistake.
  2. You forgot.
  3. You relied on another party to comply on your behalf.
  4. You don’t have the money.
  5. You are ignorant of the tax law.

Proactive Accounting & Tax Services IRS, Retirement Planning

You could grab up to $100,000 from your IRA and repay

New IRS guidance expands the possibilities for what is an adverse COVID-19 impact on you for purposes of taking up to $100,000 out of your retirement accounts and repaying it without penalties.

First, let’s look at the rules as they existed before this new IRS guidance. The CARES Act created the first set of favorable rules, and those rules are still in play.

What the CARES Act Says

A coronavirus-related distribution from your qualified retirement plan, Section 403(b) plan, or IRA gets two tax benefits:

  1. If you withdraw and keep the money, you pay no 10 percent early withdrawal penalty and you can spread the income equally over tax years 2020, 2021, and 2022. You also can elect to include it all in tax year 2020, if you want.
  2. You can repay the money within three years of the distribution date and pay no tax or penalty on the amount.

Under the CARES Act relief, you qualify for a coronavirus-related distribution if

  • you, your spouse, or your dependent is diagnosed with COVID-19 with a CDC-approved test;
  • you experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
  • you experience adverse financial consequences as a result of being unable to work due to lack of childcare due to COVID-19; or
  • you experience adverse financial consequences as a result of closing or reducing your business hours due to COVID-19.

And then there are two additional CARES Act rules for coronavirus-related distributions:

  1. You can’t treat more than $100,000 per person as a coronavirus-related distribution, and
  2. You must take the distribution on or after January 1, 2020, and before December 31, 2020.

IRS Expands Relief

With the new IRS relief, you now also qualify for coronavirus-related distributions if you experience adverse financial consequences because

  • you, your spouse, or a member of your household has a reduction in pay or self-employment income due to COVID-19;
  • you, your spouse, or a member of your household has a job offer rescinded or start date for a job delayed due to COVID-19;
  • your spouse or a member of your household is quarantined, is furloughed or laid off, or has work hours reduced, due to COVID-19;
  • your spouse or a member of your household is unable to work due to lack of childcare due to COVID-19; or
  • your spouse or a member of your household owns or operates a business that closed or reduced hours due to COVID-19.

Household

For purposes of applying the additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

Merriam-Webster defines a household as

  • those who dwell under the same roof and compose a family, and
  • a social unit composed of those living together in the same dwelling.

You have to think roommates living together create a household, and if one of them is affected by COVID-19—say, lost his or her job and stopped contributing to the rent—the remaining roommates were adversely affected and should be entitled to the IRA grab and repay strategy.

Your Repayment Options

You have many repayment options, as we explain below. To make this easy, let’s say you grab $30,000 from your IRA today and you want to know how you can repay the $30,000 with no taxes or penalties. Here are five scenarios:

Scenario 1. You repay the $30,000 before you timely file your 2020 tax return:

  • You don’t include any of the $30,000 in income on your 2020 tax return. You pay no taxes or penalties.

Scenario 2. You elect to include all $30,000 as income on your timely filed 2020 tax return, but then repay the full $30,000 sometime between filing the 2020 return and July 15, 2023:

  • You amend your 2020 tax return to remove the $30,000 from income and claim a refund of tax paid on that amount.

Scenario 3. You include $10,000 as income on your timely filed 2020 tax return, but then repay the full $30,000 sometime between filing the 2020 return and July 15, 2023:

  • You claim $10,000 of income on your original 2020 tax return, and
  • You later amend your 2020 tax return to remove the $10,000 from income and claim a refund of tax paid on that amount.

Scenario 4. You include $10,000 as income on your timely filed 2020 tax return, but then decide to repay $10,000 of the total $30,000 distribution, which you do on March 1, 2022:

  • You claim $10,000 of income on your 2020 tax return,
  • You claim no income on your 2021 tax return (because you made the $10,000 repayment prior to filing the return), and
  • You claim $10,000 of income on your 2022 tax return.

Scenario 5. You include $10,000 as income on your timely filed 2020 tax return, but then decide to repay $20,000 of the total $30,000 distribution, which you do on November 1, 2021. This one is tricky because you have two ways to do it:

  • You claim no income from the distribution on either your 2021 or 2022 tax return, or
  • You claim $10,000 of income on your 2022 tax return and amend your 2020 tax return to remove the $10,000 from income and claim a refund of tax paid on that amount.

As you can see, you have many options when it comes to taking up to $100,000 from your retirement plan.

Proactive Accounting & Tax Services IRS, Small Business Owners

COVID-19: IRS Provides Relief from Enforcement Actions

During the COVID-19 pandemic, the last thing you need is the IRS doing bad things, like auditing you or levying your bank account or wages. But don’t worry—the IRS is pausing most of its collection and audit enforcement actions.

Installment Agreements

If you have an installment agreement with the IRS, then the IRS is suspending your payments due between April 1 and July 15, 2020. The IRS will not default any installment agreements during this period.

Remember—interest will continue to accrue on any unpaid balances, so if you have the financial resources, you may want to continue to pay.

Offers in Compromise

If you have a pending offer in compromise, then the IRS will allow you until July 15, 2020, to provide requested additional information to support your offer. The IRS will not close any pending offer in compromise requests before July 15, 2020, without your consent.

If the IRS has accepted your offer in compromise, then you can suspend all payments toward it until July 15, 2020. The IRS won’t default your accepted offer in compromise for a failure to file your 2018 tax return. But you should file your delinquent 2018 return (and your 2019 return) on or before July 15, 2020, to avoid default.

Collection Actions

IRS field revenue officers won’t initiate liens and levies (including any seizures of personal residences) through July 15, 2020; however, they will continue to pursue high-income non-filers and perform other similar activities as needed.

In addition, consider the following actions:

  • The IRS won’t initiate new automatic, computer-generated liens and levies through July 15, 2020.
  • The IRS will suspend through July 15, 2020, new certifications to the Department of State for taxpayers who have “seriously delinquent” tax debt. Certification prevents you from receiving or renewing a passport. If your tax debts are subject to certification, you should submit a request for an installment agreement, an offer in compromise, or another collection alternative, prior to July 15, 2020.
  • The IRS won’t send new delinquent accounts to private collection agencies through July 15, 2020.

Audits

The IRS generally will not start new field, office, or correspondence examinations through July 15, 2020. But it may start new examinations where deemed necessary to protect the government’s interest in preserving the applicable statute of limitations.

The IRS suspended all in-person meetings regarding current field, office, and correspondence audits. Existing audits will continue remotely, where possible. You should continue to respond to any requests for information you’ve received if you are able to do so.

What if you are ready, willing, and able to get your audit started? The IRS may agree to begin the audit before July 15, 2020, if it has personnel available.

Independent Office of Appeals

If you have a case in the Independent Office of Appeals, then Appeals employees will continue to work your case. You should promptly respond to any new or existing requests for information.

Takeaways

If you have IRS problems, the COVID-19 pandemic is creating a mercy period for you that ends July 15, 2020. During the mercy period, the IRS is suspending

  • installment agreement payments,
  • new levies and liens,
  • new audits,
  • new passport actions, and
  • new referrals to private debt collectors.

Use this break in IRS enforcement through July 15, 2020, as a great opportunity to get back on track and solve any existing IRS tax problems you have, such as

  • completing and sending in those unfiled tax returns;
  • getting an installment agreement in place for your unpaid debts; or
  • requesting an offer in compromise for tax debt you will not be able to pay.