Taxpayers have the right to request the abatement of some or all of the penalties, including late filing penalties, late payment penalties and failure to deposit or failure to make estimated payment penalties, based on “reasonable cause.” Reasonable cause is a broad, but vague term that could mean anything, though usually it requires a showing that the late filing, late payment, or failure to make tax deposits or estimated payments was attributable to circumstances beyond the taxpayer's control, such as illness or death of the taxpayer's accountant, destruction of records by a fire or flood, illness of the taxpayer or other significant events such as divorce, accident, dissolution of a business, etc. IRS has quite a bit of discretion and latitude to determine what is reasonable cause and any adverse decision may be appealed to its Appellate Division. It's usually advisable to attach relevant documentation to any petition, such as third party records, affidavits, etc.
ABATEMENT OF INTEREST
The abatement of interest is more difficult. The IRS may lower the interest on tax owed when the interest is due to an unreasonable delay by an IRS official performing a “ministerial” or “managerial” act. A “ministerial act” means a procedural or mechanical act that does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer's case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. A decision concerning the proper application of federal tax law (or other federal or state law) is not a ministerial act.
A “managerial act” means an administrative act that occurs during the processing of a taxpayer's case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. A decision concerning the proper application of federal tax law (or other federal or state law) is not a managerial act. Further, a general administrative decision, such as the IRS's decision on how to organize the processing of tax returns or its delay in implementing an improved computer system, is not a managerial act for which interest can be abated.
An error or delay in performing a ministerial or managerial act will be taken into account only if no significant aspect of the error or delay is attributable to the taxpayer involved. Moreover, an error or delay in performing a ministerial or managerial act will be taken into account only if it occurs after the IRS has contacted the taxpayer in writing with respect to the deficiency or payment. The good news is that no significant aspect of the error or delay is attributable to the taxpayer merely because the taxpayer consents to extend the period of limitations.