IRS Communication

One of our clients was inadvertently late in filing their Form 990. They legitimately thought that they had properly filed the extension, however this was not the case. So how do you communicate with the IRS regarding late filings? The following are suggestions and considerations in communicating relevant information:

1. Communicate that your organization is a non-profit organization (tax-exempt) and a little bit about your exempt purpose. I had an agent tell me one time to explain in my letter that the organization is non-profit, give some statistics about what you do, and what would be given up if the penalties had to be paid. For example “if this penalty is imposed then exempt funds would have to be spent that could otherwise pay for 3 months worth of food for the endangered cockatoo – of which there is only one held in captivity”.
2. Tell them why the return wasn’t filed timely. If there was confusion in your understanding of the rules, you can say that. You will want to say that there was not “willful neglect” involved. The IRS’s position is that ignorance is no excuse, but I have seen them allow it as an excuse. Tell them what your procedures were to prepare and timely file the tax return/extension, what went wrong, and how you have changed your procedures to ensure that this won’t happen again. Be sure and say that it won’t happen again.
3. If the organization has never been late in timely filing their extensions/returns, you’ll want to say that. I recommend something like “Your records should indicate that the organization has a history of timely filing the Form 990 and/or extension requests and we request that you consider this and the circumstances described above in your review of this situation.”
4. Mention that as soon as you became aware that the extension had not been timely filed that you prepared and filed the return by the extended due date that would have been in place had a proper extension been granted.  “Please note that the error was located and the tax return was still filed with the IRS prior to the automatic extended filing deadline” (if that is the case).
5. In your closing, ask them specifically to abate the penalties and interest due to reasonable cause. Our experience is that they will often abate the penalties but not interest. “We hope this letter has shown that the failure to file the timely extension request (or filing of the tax return) was inadvertent and not due to willful neglect. Accordingly, we respectfully request abatement of the penalty in the amount of $_______.”
6. The last paragraph should include a sentence that says basically “under penalties of perjury, I declare that the statements made above are true, correct and complete to the best of my knowledge and belief.” This is similar to the declaration in the signature block of various tax forms.
7. Never embellish the truth (or lie) to the IRS.

Remember, state the facts and circumstances in a concise, complete and accurate manner.  There are no guarantees that the IRS will accept your explanation and abate the penalties, but it is certainly worth a try!

If you have questions, call me.

IRS Circular 230 Disclosure:  to ensure compliance with requirements recently imposed by the IRS, we must inform you that any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.