How do you turn reasonable cause into IRS penalty forgiveness?

Ralph
00:00:00

Hey, are you currently facing IRS penalties that are causing you sleepless nights and all this financial anxiety? Did you know there's a way to potentially have those penalties completely forgiven? Well today, I'm going to dive into the concept of reasonable cause and how it can turn your IRS penalties into forgiveness.

The question today comes from a listener named Tiffany, who is desperately seeking relief from her IRS penalties. So join me today as we work together to find hope in this situation.

Podcast Announcer
00:00:28

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.

Welcome to Ask Ralph, the show where real world experience meets biblical truth to break the bondage of financial despair.

Get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph
00:01:09

Thank you for joining me on today's show. I'm your financial evangelist, Ralph, and I am thrilled you're here.

I appreciate you taking time to be with me every day, and I promise today's topic is going to have a significant impact on your financial journey, especially if you're dealing with IRS penalties. So let's get right to it.

Now, if you missed yesterday's show, we explored the idea of living generously on a tight budget. We discussed how even with limited resources, you can still make a positive impact on others. So if you missed that episode, be sure to go check it out all of our episodes are at askralph.com.

Well, as I said, today's listener question comes to us from Tiffany, and she's got a great one. What she wrote, she said, "Ralph, I'm drowning under the weight of IRS penalties. I've been hit with a series of unexpected events-from a natural disaster that damaged my home to a severe illness in my family.

These events have made it impossible for me to keep up with my tax filings and my tax payments. I've heard about something called 'reasonable cause,' but I'm not sure if it applies to my situation. Can you please explain what reasonable cause is and how I can use it to potentially get my penalties forgiven?

I am at my wits' end and desperately need some help and some hope." Well Tiffany, you're like many of our listeners. You're dealing with that stress. You're dealing with that financial strain of IRS penalties. And you've heard about reasonable cause, but you're not sure if it's a viable option for you. Well today, we're going to explore what reasonable cause is and how it can help you get rid of those pasty penalties once and for all, because today Tiffany, I've got answers for you.

So thank you so much for reaching out with your question, Tiffany. I know that it can be overwhelming when you're facing these IRS penalties. It's that stress and that anxiety. It can really be unbearable, especially when you're trying to deal with other challenges in your life. You mentioned a natural disaster.

You mentioned some health issues. But here's the good news, Tiffany. And there is good news here. There is hope. Reasonable cause is actually a legitimate option that many people aren't aware of. And I'm here to help you understand how it can potentially alleviate that tax burden. Because listen, I've seen this firsthand.

I've also seen how these penalties can impact people's lives. In my years of practicing public accounting, I've worked with countless clients. I mean, many who were in very similar situations to you, Tiffany, and the key at the beginning is to truly understand your options and take the right steps to seek that relief.

So today, that's what I'm going to explore. I'm going to talk about what reasonable cause is, how it can help you, and the steps you need to take to potentially get your penalties forgiven.

Now remember, if you've got a question, just like Tiffany's, you can submit it by going to justaskralph.com because listen, I love answering questions. It is truly the central part of the show. It's my goal to provide you with the answers you need to help you navigate that financial journey with assurance and with confidence.

Now, before I answer your question Tiffany, let's take a moment to reflect on a Bible verse that I feel like it perfectly relates to our topic today, and it comes from the book of Psalms.

I don't often use that on this show, but this is from Psalm 32:5. Says this, "Then I acknowledge my sin to you and did not cover up my iniquity. I said, 'I will confess my transgressions to the Lord.' And you forgave the guilt of my sin." What a beautiful verse. What do you think, Tiffany? I think that was perfect for today's show.

And this verse reminds us of the importance of first acknowledging our mistakes and seeking forgiveness. Those two things go hand in hand. You know, I was thinking about it the other day, I had a little disagreement with my wife. Well, the first thing I had to do is I had to acknowledge what I had done. I had made a mistake.

I had been sinful, if you will. Broken that relationship. So that's the first part, but the second part, and the mostly, and a very crucial part of that is also seeking that forgiveness. So just as we seek forgiveness from God, we can also seek relief from our financial burdens. And a lot of people say, well, that's a step Ralph.

Yeah, but it's the truth. And see, cause here's the truth. The IRS understands that unforeseen circumstances can hinder our ability to meet our obligations because listen, they're people too. And they offer a path of forgiveness to what they call reasonable cause. And I know it may not always feel that way when you're dealing with the IRS, when you're in that battle.

And I've worked with clients in all stages of that. But dealing with them can be scary. I get it. You don't know what they're liable to do. They could levy your wages. They could, they could go after your property, can file liens. But today, what my goal is, my big, big takeaway goal today is to take away the fear and deal in facts and solutions.
So that's exactly what we're going to handle today.

I am grateful for the opportunity to share my knowledge and experience with you today, Tiffany. I'm thankful for the Lord's guidance in my life and for the ability to help others navigate those financial challenges from a place of faith.

And it is truly a privilege to be able to assist people like you, Tiffany, and others where they're looking for hope. They're looking for relief in the midst of their struggle. So that is exactly what my focus is for today.

Well now, let's get to our main content of today's show.
Tiffany, let me start by telling you a story from my own experience. I look back over 30 years and it was tough to find just one that stuck out, but then I remembered I had worked with this client named Linda. Now, Linda was another hardworking single mother. She was always diligent with her taxes, man.

When I opened up my calendar for tax prep, she was one of the first couple of people that would sign up. She was always there at the end of January or beginning of February. So this one year, all of a sudden I noticed that Linda wasn't on my calendar and it was just a series of unforeseen events that led to her falling behind on her tax obligations.

And listen. Things happen sometimes, don't they? I know Tiffany, if you're like me, things happened in my life that I wasn't expecting. And those unforeseen events can cause us so much problem when we're looking at our taxes. So in Linda's case, her home was severely damaged by a tornado. And she was also dealing with serious illness in her family.

And those are the kind of things which will turn your world upside down for sure. I think when you're at the hospital, you're dealing with a loved one, I remember it was two years ago, right now when my mother had that Glioblastoma brain tumor, and she ended up passing away. But it was right now, when I look back at over two years, I was looking at my calendar and those, listen, the last thing on my mind was worrying about filing taxes.

So these events, they can cause huge disruptions in your life. And for Linda, it made it difficult for her to keep up with her tax filings. It made it difficult for her to keep up with her tax payments. And as a result, she just blew it off. And the next thing you know, she's getting IRS notices. And those IRS notices stated, they were coming to get her. These threat notices.

And with Linda's case, you know, she had always been on time. She'd always been ahead of the curve and then she's getting these notices and she was really scared. So she came in to me. She said, Ralph, you know what I'm going through. Cause she had shared some emails and told me what was going on.

And she was just completely overwhelmed. She wasn't sure what to do. She was worried because she was getting these notices that said, they're going to levy her account. They're going to file tax liens. They're going to do all kinds of terrible things. And she was worried about both the financial impact of that and what that would look like for her family.

So I sat down with her. I said, well, let's take it one step at a time. Now, in her case, the first thing we needed to do was get her taxes filed because you need to get into a place of compliance. But then I said to her, once we get these taxes filed, let's look and see how we can get some of these penalties forgiven.

And there's a thing called reasonable cause. So let's start today, Tiffany, by defining what is meant by reasonable cause. So reasonable cause by its very nature is a situation where a taxpayer exercised what they call ordinary business care and prudence. That's a key part to this. Ordinary business care and prudence, but was still unable to comply with their tax obligations due to these circumstances beyond their control.

So let me start by saying what this really means. This means that you made good faith efforts to meet your tax obligations but there was something that was preventing you from doing so because of some unforeseen event or some unforeseen circumstances. Now notice again, I said in good faith. This is not when you simply don't bother to file.
Listen, in my view, that is just a laziness. And in the end that's tax evasion, but that's not what we're talking about here. Now the IRS recognizes that unforeseen circumstances can sometimes happen. They hinder taxpayers from fulfilling their obligations. And here's the key. If you can demonstrate that you had a legitimate reason for not meeting those tax obligations, you may be able to have your penalties forgiven. So let's talk about some of the more common examples, Tiffany. Let me share these with you.

So let's get to some common examples. This one is very common. This is Serious Illness or Death. So if you've got an immediate family member that's experienced a severe illness or passes away, it's understandable that your taxes might not be your top priority.
Like I said, when we were working through this issue with my mom, she had surgery. The surgery didn't go well. We were praying for a recovery. But to be blunt, taxes were the last thing on my mind. So that's the first one the IRS would acknowledge if there's a serious illness, if there's a death.

Another thing, and Tiffany, you mentioned this in your letter and that's Natural Disasters. That's things like fires, floods, hurricanes, and all other natural disasters. Because these disrupt your life. You might not have access to your paperwork. You might not have access to your home. You might be trying to figure out where you're going to sleep at night and that will certainly make it difficult to file or to pay your taxes on time.

Now I will tell you, most of the time, the IRS is going to look for what's called a federally declared disaster area. So pay attention to that because not all of those issues are natural disasters. That doesn't mean if you've got a fire in your house or you've got a particular issue in your house that the IRS won't recognize.

And we'll talk a little bit later in the show about how to document those things. Another big one that they recognize is the Inability to Obtain Records. That could be as part of a natural disaster, but maybe you've got, you had a fire or a theft or some other unforeseen circumstances. The IRS will consider this as reasonable cause for late filing or late payment.

You know, this is where you've lost your documents. I see this a lot of times. If somebody has a business and the business closed, and they were an employee there and they didn't get their W-2 form. So that can be a real big issue. Now let's talk about some of the things that are not reasonable cause.

Tiffany, I thought I wanted to share these because a lot of people say, well, Ralph, I've got some great reasonable causes. So these are the ones that are not reasonable cause. First one is this, and I laugh a little bit because the IRS will not allow reasonable cause to be Lack of Funds. If you don't have enough money to pay your taxes, that's generally not a valid reason for penalty abatement.

It may very well be a realistic reason why you can't afford to pay. But the lack of funds is not generally a reasonable cause argument. Now you can use that as part of it for why you didn't pay on time. You may be able to get some penalty relief from that, but in general, the lack of being able to pay is not an excuse. The next one is this one. People, they always say, Ignorance of the Law is no excuse and that's the case with the IRS. Not knowing the tax laws, not knowing the deadlines for taxes is not an excuse for late filing or late payment. They expect that you are going to know what you need to do. Now to be honest with you, I think that's a little bit much because the tax code is voluminous. This is what I do for a living, which leads me to the next thing in general. The IRS will not show reasonable cause if you rely on a tax professional. Now, you can seek advice from a tax professional, but as I say to my clients every day, this tax return that you're signing, this is your agreement. This is your attestation, fancy accounting term that's saying, yes, this is correct. See ultimately, you're responsible for your tax returns. You're responsible to make sure they're paid on time, make sure they're filed on time. Now I will tell you, I'm going to drop a little caveat here sometimes, and I've worked with clients on this many times.
You can mitigate penalties if you use what's called the reliance on a third party. In other words, if you went to somebody like me and you said, Ralph, listen, I want you to file my taxes. And you say, Ralph, I have no idea what's income. I have no idea what deductions are, have no idea what credits are.

And I tell you some off the wall crazy stuff. And you say, well, that's great. I'm going to get a huge refund. Well, you're doing a reasonable reliance. You're not a tax expert. The IRS doesn't expect you to be a tax expert. So sometimes we can use that to mitigate penalties, but in general, and hear me on this.

Just the fact that you relied on a tax professional to file your returns doesn't get you out of the penalty zone. So let's talk, Tiffany, about the process of this, because now we've talked about what they do see as reasonable, what they don't see as reasonable, but let's talk about the process of this because we want to make sure we're using a concise process for the best optimum results.

The first step in all of this, Tiffany, is to Gather Supporting Documentation. You want to collect everything that's related to that claim. You want to make sure that every document is clearly labeled, make sure it's easily identifiable. If you're going to make copies of something, make sure they're clean copies.

If it requires color like photos and all that, spend a little extra money and send them colored pictures or colored prints. And I'm going to discuss what that looks like later in the show. So once you gathered your supporting documents, the next thing you want to do, and I'm going to talk about working with professionals. I'm going to make an assumption that you're working with a professional at this point, or you've decided, listen, I'm just going to do this on my own.

The second thing is to Contact the IRS. Now you can do that by calling them or you can submit a written request. Now if you decide to call them, the best thing you can do is when you get that notice, every single notice the IRS sends, they'll have a telephone number on it. But when you call, do your homework ahead of time, have your documentation ready because they might say to you, Hey, we need a copy of that.

We need you to fax this to us. They generally don't let you email documents, but maybe they'll let you upload it through their secured portal, but be prepared to explain the situation. The worst thing you want to do is get an IRS agent on the phone or a person that's answering the phone at the IRS and say to them, Oh, you know what?
I didn't expect you to answer, Hey, what do I need to do? No. Be prepared. Also, you need to be prepared to wait. Now listen, with what's going on in the political atmosphere right now, you might be waiting a long time because you need assistance. If there's less people, especially this time of year, as I record this, it's in March, it's a big time for tax season, they're processing refunds.

But listen, I think it's a good thing we're trimming down the IRS. It's not going to be so good if you need to get in touch with them. So that's option one is call them. Second option. And I actually like this one better. And that is Submitting a Written Request. One of the best ways to handle or best way to ask for one of these penalty abatements, because my experience has been, if you call them, 9 times out of 10, they're going to say to you, well, you need to put that in writing.

You need to send us a copy of this. You need to send us a copy of that. You need to send us proof. And I'm going to talk all about those things here in a few minutes. But writing a letter to the IRS, explaining your circumstances in detail can be a very effective way to get penalty abatement. A lot of times I'll say to clients, listen, I could write a letter for you and I'm happy to do that.

But one of the things I want to include in that is a letter from you. I want you to really get into what happened. Tell us about what happened to why you couldn't file. What was that natural disaster? What was that illness? What was that loss of a family member? What was the impact to you? Because, listen, at the other side of this, you've got an IRS person that's reading this. They're a human being too. They'll understand that if it comes from you. But when you do write to them, make sure you include your name, make sure you include your social security number or your taxpayer identification number. Make sure you tell them what year you're talking about.

Everybody just assumes the IRS knows, Oh, this is for such and such a year. I got a call yesterday from a client. He said, Ralph, I got this notice from my taxes from last year. First thing I say to clients is send me the notice because trying to figure this out over the phone is impossible. Well, he sent me the notice.

It was for 2022, not 2023 or 2024. So make sure if you're sending the IRS a letter that you're explaining what tax year that's for and then discuss in detail what is going on, what the penalty was, what you're asking them to do. It sounds a little bold, but you basically want to say to the IRS, here is who I am.

Here is my information. Here's the situation. Here's what happened. And here's what I want you to do. That's where you say a statement like I would like you to remove all penalties and interest. I would like you to resolve this issue. Here's the thing. Here's a pro tip for you. You want to make it easy for the IRS to understand what's going on.

You want to overwhelm them with details. Because after 30 years of experience in this, here's what I believe. The more you make it easy, the more you make it simple, the more likely they're going to move on with your request. Now here's another pro tip. Let's say you get a notice and it's because you forgot to report something on your tax return.

I see this routinely. Maybe you had a stock sale. Maybe you had a, let's use a simple example. Let's say you had an interest income account with a bank or credit union, and you just totally forgot about that. And let's say you had a couple, let's say a hundred dollars worth of interest income and you didn't put that on your tax return.

So fast forward to the following year, you get a letter from the IRS and they say, Hey Joe, by the way, you forgot to report this $112 in interest you got from your credit union. Now, you might say, Oh, in addition to that, Hey, you owe us the tax, but guess what? Because it was from last year, you owe us a penalty and you owe us interest.

So one of my big pro tips is consider paying the tax you owe and that interest charge when you ask for that penalty abatement. It will look something like this. You would send them a simple letter and says, Oh, you know what? You're absolutely right. Again, you're putting your name, your address, your phone number, your taxpayer identification number, your social security number, what tax year is in question.

Send them a copy of the tax return, send them a copy of the notice, but you would make a statement like this. Hey, I've enclosed a check for the $22 that I owe you in tax. I've also added the $3 in interest. Now what I'd like you to do is remove that penalty because here's a deal. I've seen this work many times.

The IRS gets this and they say, okay, well the fair administration tax, and I'll talk about that a little bit later, but the fair administration of taxes, this person owes the money. Oh, they've paid it. This person owes us interest. Well, they've paid it. You know what? It's fair. I'll go ahead and waive the penalty.

So make sure you're attaching all of that documentation to your letter. Make sure that each document is clearly referencing your letter. It's okay to write all over it, circle stuff, highlight stuff, make it simple for them. So that is the main part of that. Now the thing you want to make sure you do, whether you call or whether you send in a letter is to make sure you put on your calendar, a Follow Up event, because this is critical.

This is where having that irs.gov account that I talk about on the show comes in handy because you want to make sure they got your request, you want to make sure it was sent to the right address, and then you can see what's going on. So after you submit that request, especially if you're doing so in writing, follow up with the IRS.

Make sure your request is being processed. You can check the request by calling them or you can go on to their online tool at the irs.gov because you don't want to just assume. A lot of people make this assumption. They'll say to me, you know, I sent this letter back to them a year ago, never heard from them.

And all of a sudden my employer called me down to HR and said my wages had been attached and I had no idea this was coming. Now I'm going to be honest with you. Most of the time they've gotten notices and they just ignored them. But make sure you follow up because the IRS unfortunately isn't always great about following up with you.

Now sometimes when you send in that response letter, it's what I call it when you respond to them. They might send you a letter that sounds something like, Hey, Okay. We got your response, but we're going to take another 60 days. We're going to take another 90 days. That's what they're supposed to do. So if you get one of those, don't panic.

That's actually a good thing. What that means is they've got your information and they're working on it.

All right, Tiffany. Let's talk about some of the main tax related penalties. These are the ones that I see frequently being sent to clients who have issues with their taxes. The first one is what we call the Failure to File Penalty. Tiffany, this is exactly what I was talking about with my client, Lisa.

This is the penalties imposed when you don't file your tax return by the due date. You just forgot about it or you file it late. The IRS sets a deadline. And the thing that's so annoying about this is you can avoid this penalty completely if you just file an extension. Now you can't get out of the failure to pay, which we're going to talk about in a second, but the failure to file penalty is a penalty that you should never receive.

If all you've got to do is take two minutes and ask for an extension, it's an automatic extension. It's automatically six months added to the calendar. So you can avoid this one completely by just filing an extension. The second one is what they call it a Failure to Pay Penalty. A lot of people get mixed up on this one, especially if they filed that extension.
They say, Ralph, wait a minute. I got this notice from the IRS. I had filed an extension. I did my tax return in September because I had till October 15th to do it. And then they sent me a letter saying that I owe them penalties. I owe them interest. Well, that's right because here's the deal. You are required to pay the tax at the tax deadline.

So if the tax deadline that year is April 15th, guess what? The tax is due. Now, a lot of people are saying, Ralph, but that doesn't make any sense. If I've got to try to figure out what my taxes should be, how do I know how much to pay them? That's a very valid point. So when you fill out one of those extension forms, one of the things you'll notice on there, it actually requests that you make an estimated tax payment if you think you're going to owe them.

So if you kind of worked up the numbers and you kind of think you're going to owe something to avoid that failure to pay penalty, the best thing you can do is send in a payment with that estimated or with that extension request so that you don't get hit with that penalty. Now one on the business side, this isn't really an individual tax issue, but I thought I'd mention it here is the Failure to Deposit Penalty.

Now this is if you're an employer and you're withholding taxes from your employees. This is typically, like I said, these are owners collecting payroll taxes. And this is an area where I see many business owners get in trouble. And that's why I'm going to take a little sidetrack here for a second and just tell you don't do payroll yourself.

If you've got a small business, even if you only got one employee, even if it's just you that's the employee, pay somebody to handle your payroll preparation, whether that's an online service, you can reach out to somebody like me or one of the big payroll providers. You might be saying, Ralph, that's a lot of money to spend, but listen.

This do it yourself approach can get you in trouble. I have seen businesses rocked with all kinds of penalties, with all kinds of interest because they tried to do payroll themselves and they got the payroll checkout, but they had no concept of how to handle the filings that go behind that. So that was just a little aside there, but that is a big one that I see people dealing with as well.

Now, one of the ones that I see more frequently now is what the IRS calls the Accuracy-Related Penalty. So this is the penalty that's imposed when you understate your tax liability due to negligence or due to disregard of rules and regulations. So what I'm talking about here is basically you file your tax return.

Great example. You just make up numbers that don't make any sense. And the IRS sends you an audit notice and they say, Hey, Ralph, explain this to us. You deducted your pet cow as a dependent. Clearly, you can't deduct cows. I raised black Angus cows. I use that as an example. Most people say dog or cat, but I thought it'd be funny and spice up a little bit with a cow.

That is a accuracy related issue. So the IRS is going to charge you a penalty. And let me just tell you, these penalties can get severe. I'm not going to talk about specifics in the amounts. I don't want to lose you in the minutiae today, but that accuracy related penalty, if the IRS can assess this, they're going to.

So pay attention, make sure you understand what you're filing, work with a professional. Now let's take another little sidetrack, Tiffany, and let's talk about some other ways that the IRS will forgive penalties.

These are some great ways in addition to, we talked about that reasonable cause, and I'll talk to you about how you document that in a few minutes.

But these are some other ways that the IRS will abate penalties. The first one, and I love to use this one. It's what's called the First-Time Penalty Abatement. You can think of this like that when you used to play Monopoly, it said, get out of jail free card. Now it's only going to work the first time. So if you've got a clean compliance history, you've always filed your tax returns on time. This is exactly the situation that I have my client Lisa, and this is the first time you've penalized. You might qualify for first time penalty abatement. Now, this is a one time thing. They're going to do it one time. They're going to go back and look at your history. And if you've done this before, they're going to say, Oh, not this time, my friend. It's an administrative waiver that can be used to abate that failure to file penalty, that failure to pay penalty.

And if you're a business, that failure to deposit penalty, but here's the deal. You got to understand this. To qualify, you generally must not have any penalties for three of the prior tax years. That's really how far back they're going to look. So here's another pro tip. You can use that first time abatement if it's been at least three years and you've done the right things.

So if you're in that position where, you know, 10 years ago, something happened, you messed up your taxes, you didn't pay them on time, you can still qualify for that first time penalty. They beat me and be saying, Ralph, I've been filing taxes for 30 years. As long as it's not in the last three years and you don't have some sort of open payment plan or something like that.

So that is a great thing to do. Another thing they will allow you to do is what's called a Statutory Exception. This is where the tax code provides specific exceptions to penalties. For example, let's say you relied on an incorrect written advice from the IRS. You might qualify for penalty relief about this one, but here's the deal.

You need to understand this. The IRS generally does not put things in writing you call in and you talk to an IRS person on the phone, listen, the truth is you might get 12 different answers to the same question. You don't rely on that advice because that answer could depend on the day, could depend on their mood that day.

Now one exception to that. This is a very, very specific thing is you can ask the IRS for what's called a Private Letter Ruling. I'm not going to get into that today, but that's where you send to the IRS and they charge a fee for this, of course, and you say to them, Hey, IRS, here's a scenario. How do you handle this?

I see this happen with very complex tax situations, but that's where you might use that thing. Now, another thing the IRS does is what's called Administrative Waivers. This is if there's something within the administration to the IRS that caused some sort of widespread processing delay. I saw a lot of these during COVID.

Now I will just tell you. We're coming out of COVID now. Now we might be going into another administrative issue as Elon Musk and Donald Trump are cutting back and reducing the staffing levels. This is also something you see with natural disasters, especially if an IRS service center has been impacted.

A lot of times they'll say, you know what, you're right. We couldn't process your return. We couldn't do it in a timely fashion, but you've got to pay attention to those things and say to the IRS, Hey, I wanted to do this, but administratively I sent it on this date. I see this a lot of times, the IRS generally will not waive interest, but these penalties that accrue and go higher and higher, oftentimes you can say to the IRS, Wait a second, I sent you a response to this back a year ago.

You sat on it. You didn't do anything. I would like to have those penalties removed because you kept adding the penalty, even though with good faith and my good intentions, I tried to resolve it. Another thing we're not going to spend a lot of time on is today is called an Offer in Compromise. And this is a program that allows taxpayers to settle their tax debt.
You might see these noted on TV, you know, sell your tax debt for pennies on the dollar. I've done a couple of shows about this and that's a place where they can remove penalties. They can reduce that full amount. Oh, but here's the thing. You got to understand something about this. And I guess I'm just going to briefly touch on this today.

You got to be current with all your tax filings, including estimated tax payments. And you've got to be able to demonstrate that paying your full tax liability will create this significant economic hardship. And this is a process. I mean, this is a process that takes months, sometimes a year. So I'm going to recommend you have a professional handle.
So I want to tell you a story because you're never going to believe this one. I had a client and it's probably been 20, 22, 23 years ago, came into me. I had been doing his taxes for a while and he had gotten way behind on his taxes. And he says, Ralph, he says, I feel like this is mountain. I got the IRS sending letters.

They're sending letters to my employer. They want to withhold wage. They want to withhold my money from my paycheck. And I said, listen, and I think the guy, I can't remember the guy's name I wouldn't use it on the show. Let's just call him a Woody, for example. So I said to Woody, I said, listen, guy, I said, why don't we consider following what's called an offer in compromise?

He was really in a bad financial place. And I said, but if we file this offer in compromise, we may be able to get them to sell it. As I recall, he owed about 80,000 in total taxes, but he was having issues. He was partially disabled, his income had cut back where he worked, they had cut the hours, they had a workforce reduction.

So anyway, long story short, we filed this report. It went through, we went through months on this thing. We had to have an administrative hearing with the IRS. We had to talk to this one. We had to talk to that one. Supply all these documents. So anyway, in the end, the IRS agreed to a settlement. They said, listen, we will take, so again, this was 80,000 in tax debt.

They said, we'll accept 16,000. I was like, this is fantastic. So I called the client. I said, Hey, I got great news for you today. The IRS is going to accept 16,000. He says, Ralph, you're a miracle worker. What a great job. I said, but listen. You got 30 days to pay it. Now we had already talked about, he had some money set aside.

He could take a withdrawal from his 401k plan. He was going to pay these taxes and be done with it. So I said, great. I said, let me know when you're ready. We'll contact the IRS. We'll get that all arranged. Well, I didn't hear from him 30 days go by then 40 days, 50 days. So 60 days, I get a letter from the IRS agent that I had been working with and said, Hey Ralph, what's going on with your client?

I said, honestly, I haven't heard from him. Let me call him. So I call him on the phone and I said, guy, I said, we've got to make this payment. He goes, you know what? The wife and I talked about it and the heck with the IRS, we took a trip. So obviously that's a bad plan, but I just thought I would share that story because if you're going to do one of those offer in compromises, make sure you follow through because then I don't know what ended up having, he ended up leaving me as a client because I said, I don't want to work with this anymore.
All right, Tiffany, well, let's talk about some of the documentation. We talked about how or why the IRS would do those penalty forgiveness. We talk about the process. Well, now let's talk about some of the documents that you're going to want to provide because this is where the rubber meets the road. Now let's say you've got that medical issue.

If you've got any kind of medical issue, you're going to need to provide Medical Records. A note from your mom that, you know, Tiffany missed such and such isn't going to work. I'm sorry. So you need a Doctor's Note, an official note, or a letter from a healthcare provider that really details the nature of the illness.

I mean, they need to be specific. You need to put in there things like the dates of treatment, how the illness impacted your ability to file or pay your taxes. Yes, you heard me right. That healthcare provider needs to lay it out. In detail. Maybe this is Hospital Records, you know, discharge papers, treatment plans, or other hospital records that document that serious illness or injury.

I'm gonna tell you a funny story here real quick. I had a client one time, was so aggravated with the IRS because the person that was on the other end of the letters that they were sending just wasn't paying attention and he finally said, Ralph, he says, guess what? I still have the hospital wristband that they put on me while I was undergoing.

I think in this particular case he had quadruple bypass surgery. It didn't go well. He ended up spending three months in the hospital. So finally he says, Ralph, I'm at my wits' end. He actually went to the FedEx place and he sent them the actual wristband that he had from the hospital, which ended up being pretty good proof.

We finally got that issue resolved. Another thing you might want to include is Prescription Records. If you've got some medications that were needed for part of this illness treatment, it's going to show that you had that serious health condition. Now, Tiffany, I hate to say this. We're going to talk about death.

Now, you know, one thing they say about is that death and taxes are certain, and I hate to say it this way, but if you've had a death in your family, you're going to need to prove it. This isn't going to be that, hey, I called off work because my aunt Sally died. And your employer goes. Okay. That sounds good.

So you might be saying, well, okay, how do I do that? Well, one of the things I'm going to recommend that you do is get a copy of the Death Certificates. That's what you get to verify that someone has passed away, whether that be a spouse, a parent, or a child. That is very, very good thing to get and a good thing to send to the IRS.

Again, we want to overwhelm them with information. We want to show them, Hey, we're not playing games here. Another thing you can send them is Funeral Home Receipts. Again, I know this is sort of ugly, but receipts or invoices from the funeral home, it's going to show the dates. It might show the date of services.

It might show the things that went on around that. I actually had a client and this is a crazy story. I had a client send in photos of the body in the coffin. He wanted to make sure they understood that he had lost his wife and my man sent in actual color photos of his wife in the coffin. I'm not sure how that turned out in the end, but the IRS certainly didn't have any argument in saying that was a real death.

Now, Tiffany, you also mentioned in your letter about natural disaster. So let's talk about how you can prove that. And I actually recommend if you're going through one of these natural disasters, whether it's just you or it's the area you live in. Create a scrapbook because you're going to want to have documentation that can include things like Insurance Claims, copies of the checks you got from your insurance company, the assessment reports, any of those things, whether that be for a fire, for a flood or a hurricane.

And if you're in one of those areas that FEMA came into, keep copies of the documentation. If you went and met with a FEMA representative, get copies of that, show the assistance that you received and the due dates and all that sort of thing. Another thing I'm going to recommend is keeping Newspaper Articles or Official Reports of that.

Anything that can document the natural disaster and its impacts on your area. Now, Tiffany, one of the other things we talked about was how about those situations when you can't obtain the records you need, you got that inability to obtain records. So if you're in that situation, one of the things I could recommend that you do is maybe you want to have a copy of police reports or insurance claims.

If you've got a fire or a theft, because that's going to document that loss of those financial records due to that fire or due to theft or any other unforeseen events. If you have to rebuild your house, keep track of those reconstruction records. You might need them for your taxes anyway. But have any of those documents that show your efforts to reconstruct things, all those things that were lost, such as bank statements, invoices, or receipts.
I remember I had one particularly bugger email or IRS agent. One time he was sitting there wanting to argue with me and my client that, Oh, his records weren't really lost. So I actually brought to the IRS meeting partially burnt records. I mean, you could see where these things were singed on the end. I think it was the client's checkbook or something along those lines.

And at that point, the IRS agent is like, you know what? You're right. This guy definitely did have an issue. Now there's a few more areas of documentation, Tiffany, that I've seen over the years. One of the ones is if you're self preparing your tax returns and you're using online software that crashed and, and you lost your data.

A lot of times the IRS is not going to let you do that. It's not going to be a complete release, but you can at least say, Hey, here's a copy of the message log. Here's my communication back and forth with tech support, those sorts of things. If you've got IT support tickets, all those things.

So if you have some kind of technological issue, just make sure you're documenting it. Okay. Now, another thing we talked about is those financial hardships. And this is commonly called the fair administration of tax. Remember I talked about if you send in the penalty money, excuse me, if you send in the tax you owe and the interest you owe, one of the things you might want to document, like let's say that you're saying to the IRS, listen, I'm doing everything I can here.

I'm sending you the tax. I'm sending you the interest, but I just simply can't afford these penalties you're adding. Send them copies of your bank statements. Send them copies of your pay stubs, anything you can show that shows this unexpected financial hardship. If you're on unemployment, listen, send them copies of your unemployment notices, send them your filing for unemployment.
If you're struggling because of debt, send them copies of the loans, send them copies of your credit card statements. Now the couple other things you want to be potentially keeping is travel records. Maybe you've got court orders or legal documents that prevented you from meeting your tax obligations.

Maybe you had an issue with an employer. All of these things can add to that mountain of documentation that you can use to get those penalties waived. Penalties waived or eliminated. So Tiffany, in the end, I can't say that you're going to be successful in getting these penalties removed, but I frequently tell clients this, it's worth trying into the old adage, nothing ventured, nothing gained.

It's worth trying. There's also this thing called the taxpayer's advocate service. If this, if the normal administration channels don't go through, and I'm probably going to cover that on another show. But if I would just try this, Tiffany, everybody else, listen and try it and see what happens because worst case scenario, they can say to you, listen, no, no, we're not going to do it. But if you don't try, you'll never know.

I just want to remind you, as always, I write a daily blog based on the content of the show where I go even deeper. I send some specific resources I used in creating today's show. Actually in today's blog, I actually have a letter that you can use as a format for doing that.

There's a bunch of research that I'm encouraging you to go check that out. You can get all of our blog posts at askralphpodcast.com/blog

Well, let's get to our reflection questions so we can reinforce what we talked about today. And I'm going to make this brief, but the first one is this, what are some unforeseen circumstances that impacted your ability to meet your tax obligations in the past?
What are those things that have made it so that you can't file those taxes on time? What are those things that have happened that resulted in those penalties? The second question is how can you demonstrate to the IRS that you exercised ordinary business care and prudence in your situation? So if you're going through one of these situations.

 start thinking along the terms of how do I prove this to the IRS? What documents are they going to ask for? How can I be successful in getting this penalty waived? Because if you're doing it, as you're going through it, you're going to keep those things. Like I talked about that scrapbook and number three.

It goes right along with what I just talked about. What steps can you take today to gather the necessary documents and present a strong case for penalty abatement? Maybe you're listening to this or watching this and you're going through that natural disaster, or you're going through that health crisis, or you're going through that loss or death of a loved one.
Start thinking along what steps can you take right now while you're going through it. So you have that file ready. So that if you want to request a penalty abatement in the future, you're ready to go.

So if you find value in today's show or in the show in general, I want to encourage you to consider supporting the show.

Your support allows us to reach more people with this message of hope and help them navigate their financial challenges. Tiffany, just like you're going through today. Maybe somebody else can navigate that if they had access to the show and you can support the show by going to askralphpodcast.com/support.

And listen, it's impactful. This is the truth. Your support will help others find that financial peace of mind. Maybe you listen to today's show and you're like, Ralph, man, I feel great about this. Now I'm going to go and file for that penalty abatement. I know what documentation they're looking for. So I'm going to encourage, I'm going to strongly encourage you.

Share the show, but also consider supporting the show so that we can reach more people. We can get on more platforms. We can get in more networks and show that people that there is hope you get to that by going to askralphpodcast.com/support. So Tiffany, let me just do a quick recap of what we covered today so you don't miss anything.

We talked about reasonable cause. That's where a situation where a taxpayer exercise that remember, I said, ordinary business care and prudence, but was still unable to comply with their tax obligations due to those unforeseen circumstances beyond their control. We talked about the evidence you need to request that penalty abatement.

We talked about being clear and concise and providing with all them documentation. We talked about other ways for that penalty forgiveness. That's that first time penalty abatement, those statutory exceptions as administrative waivers. We talked a little bit about that offer and compromise. And the big takeaway as I get to the end of the show today, the big takeaway is get guidance from a qualified tax professional, a qualified accountant, because that will make this process easier.

And listen, if you are really working to get that penalty reduced, you might have to spend a little money because they're going to be able to help you build the strongest case possible. So I'm going to encourage you to really think through that and consider hiring someone, which leads me to the next thing.

If you're listening or you're watching this right now and you're facing IRS penalties and you need help finding a way out of that, you're looking to find success and peace in dealing with your financial situation, whether it be a tax issue or just struggling with your finances.

I'm going to encourage, I'm going to strongly encourage you to book a call with me because you do not have to walk this path alone. I will work with you to create an individualized plan, whether that's fixing back taxes, helping you break the cycle of debt, working with ways to build a stronger retirement, working with ways to build a budget.

The first step, the first step in finding that financial peace of mind is taking action. So you do that by booking a call with me, you can go  right to askralph.com at the top of the screen. You'll see a button that says book a call with Ralph. And let's work together. Let's get you to that financial piece. As we master your finances from that Christian perspective.

Now, before we wrap up, I just want to share a few letters I got over the last few days of people who have been helped by the show. And this first one comes from Brad. This is what Brad said. He said, "Ralph, your show has been a lifesaver for me.
I was struggling with my finances and I truly didn't know where to turn. Your advice and guidance have made a real difference in my life. Thank you so much!" Well, Brad, thank you for checking out the show. I want to encourage you to stay with it. I am just a vessel to this. Make sure you send it to other people and share with you what you're learning on the show.

But great. I'm glad to hear that, Brad. And our last one for today is Mary. Mary wrote this. She says, "Ralph, I never thought I could manage my finances and grow in my faith at the same time, but your show has shown me that it's possible. So thank you so much for being a beacon of hope and wisdom." Well, Mary.

All I can say is thank you. I appreciate that. I am your shelter in the storm. So I'm going to encourage you to go check it out and to share the show with other people. And I truly want to hear from you if you're listening to this right now, or you're watching this because I want to hear from you because those letters.

Those little quick notes. They really help me produce daily content. They give me ideas for the show. They give me questions for the show. So I'm going to encourage you to reach out. You can send me an email and yes, I look at my own email. I respond to as many as I can. You can do that by sending it to ralph@askralph.com.

Let me hear your stories. Let me hear your successes. Let me hear your failures and let me help you get to that next level.

Now tomorrow's show we're going to be discussing whether you're inviting financial trouble. Now listen to me on this one by automatically filing taxes jointly with your spouse.
That's a little teaser out there. But it's a topic that many listeners have questions about. They just assume, well, I need to follow up with my spouse, but we're going to go a little deeper in that tomorrow and talk about the pros and cons of that. So be sure to join me again tomorrow as we talk through that topic.

So thank you again for your time. I thank you for supporting the show and remember this. My passion is to help you achieve financial success. I want you to live out your dreams and I want you to grow in your faith. And I know together we can master your finances from that Christian perspective. So as I always end the show, stay financially savvy and may God bless you abundantly.

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