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How to Fight an IRS Accuracy-Related Penalty

Facing an accuracy-related penalty from the IRS can be an unnerving experience. This penalty is imposed when the IRS determines that there are substantial understatements or negligence on your tax return. If you find yourself in this situation, it’s essential to understand your rights and take appropriate steps to challenge the penalty.

The accuracy-related penalty is a monetary fine imposed by the IRS when it identifies errors or inaccuracies in your tax return. This penalty can be substantial. Generally, the IRS imposes a charge of 20% of the additional tax owed, but it can be higher. It’s important to note that the accuracy-related penalty is separate from any additional tax you may owe due to the identified inaccuracies.

There are several common reasons why the IRS may impose an accuracy-related penalty, including:

  • Negligence. This occurs when you fail to exercise reasonable care in preparing your tax return or maintaining accurate records.
  • Substantial Understatement of Income Tax. If the understatement of your tax liability exceeds the greater of 10% of the correct tax or $5,000, the IRS may impose an accuracy-related penalty. Do you claim a Section 199A Qualified Business Income Deduction on your tax return? If so, the penalty applies if you understate your tax liability by 5% of the tax required to be shown on your return or $5,000, whichever is greater.
  • Valuation Misstatements. If you overstate or understate the value of certain assets or liabilities on your tax return, you may be subject to an accuracy-related penalty.
  • Transaction Understatements. Certain transactions, such as those involving tax shelters or other complex financial arrangements, may trigger an accuracy-related penalty if they are not properly reported.

Next Steps

If you receive a notice from the IRS proposing an accuracy-related penalty, it’s crucial to act promptly and follow these steps:

  1. Review The Notice Carefully. Ensure you understand the specific reason(s) for the proposed penalty and the underlying issues identified by the IRS.
  2. Gather Relevant Documentation. Collect all records, receipts, and other supporting documents that may help substantiate the accuracy of your tax return.
  3. Respond Promptly. The IRS notice will provide a deadline to respond. This is typically 30 days from the date of the notice. Failure to respond within the specified timeframe may result in the penalty becoming final and potentially more difficult to challenge.

If you disagree with the IRS’s proposed accuracy-related penalty, you have the right to dispute it. Simply call the IRS at the number listed on your notice or send a letter to the IRS with the following information:

  • A copy of the notice or letter sent to you
  • The penalty you are disputing
  • An explanation of why you think the penalty should be removed

Be sure to sign and date your letter and include any supporting documentation. This should all be sent to the address found on your penalty notice or letter.

Important Deadlines and Documentation Requirements

When challenging an accuracy-related penalty, it’s crucial to adhere to strict deadlines and documentation requirements set by the IRS. Failure to meet these requirements can jeopardize your appeal rights and potentially result in the penalty becoming final. Some key deadlines and requirements include:

  • Response Deadline. As mentioned earlier, you typically have 30 days from the date of the IRS notice to respond and file a protest.
  • Statute of Limitations. There are specific time limits set for filing an appeal or challenging the penalty. These time limits vary depending on the circumstances of your case.
  • Documentation Requirements: The IRS may request specific documentation or evidence to support your position. Providing incomplete or insufficient documentation can weaken your case.

Gathering Evidence to Support Your Case

To effectively challenge an accuracy-related penalty, you’ll need to gather compelling evidence to support your position, including:

  • Tax Records and Documentation. Maintain meticulous records of all income, expenses, deductions, and credits claimed on your tax return. This includes receipts, invoices, bank statements, and any other relevant documentation.
  • Professional Advice or Opinions. If you relied on the advice of a tax professional, such as a certified public accountant (CPA) or an enrolled agent, obtain written documentation of their advice and the reasoning behind it.
  • Industry Standards or Guidelines. In certain cases, you may be able to demonstrate that your actions were per industry standards or generally accepted accounting principles (GAAP).

Possible Outcomes and Resolutions

The outcome of your challenge to an accuracy-related penalty can vary depending on the strength of your case and the evidence presented.

  • Full Abatement. If you successfully demonstrate that the penalty was imposed in error or that you had reasonable cause for the inaccuracies, the IRS may fully abate (cancel) the penalty.
  • Partial Abatement. The IRS may agree to reduce the penalty amount based on the evidence and arguments presented.
  • Penalty Upheld: If the IRS determines that the penalty was properly imposed and that you have not provided sufficient evidence to support your position, the penalty may be upheld in its entirety.

Working With a Tax Professional to Fight The Penalty

Navigating the process of challenging an accuracy-related penalty can be complex and time-consuming. Consider working with a qualified tax professional, such as a tax attorney or an enrolled agent, who has experience in dealing with IRS penalties and appeals. A tax professional can:

  • Evaluate Your Case. A tax professional can review your specific situation and advise you on the strength of your position and the likelihood of success in challenging the penalty.
  • Represent You Before The IRS. They can handle all communications and negotiations with the IRS on your behalf, ensuring that your rights are protected and that your case is presented effectively.
  • Provide Legal Expertise. Tax professionals can offer valuable legal advice and guidance throughout the appeals process, increasing your chances of a favorable outcome.

If you’re facing an IRS accuracy-related penalty and need assistance, contact Tax Defense Network. Our team of experienced tax attorneys and enrolled agents can provide expert guidance, represent you before the IRS and increase your chances of a favorable outcome. Call 855-476-6920 today for a free consultation.