The IRS Told You Wrong: Penalty Abatement for Erroneous IRS Advice

Most penalty relief is discretionary. The IRS weighs your facts and decides. This one is different.

IRC 6404(f) says the IRS shall abate any portion of any penalty or addition to tax attributable to erroneous advice furnished to the taxpayer in writing by an IRS officer or employee acting in an official capacity. Treas. Reg. 301.6404-3(a) uses the same mandatory language. If the requirements are met, the abatement is not a favor. It is the law.

The requirements are strict, though, and most people who say the IRS told them something wrong cannot meet them. Here is what the statute actually demands, and what to do if your situation falls short.

The three requirements

Treas. Reg. 301.6404-3(b)(1) says the rule applies only if all three of these are true:

• The written advice was reasonably relied upon by the taxpayer.
• The advice was issued in response to a specific written request for advice by the taxpayer.
• The taxpayer requesting advice provided adequate and accurate information.

Each one has teeth. Take them in turn.

It has to be advice, in writing, answering your written question

The regulation defines advice narrowly. A written response from the IRS is advice only if it applies the tax laws to the specific facts you submitted in writing and gives a conclusion about how you will be taxed.

The regulation's own example shows what does not count. A taxpayer asked whether an activity was passive. The IRS sent back copies of the relevant Code and regulation provisions and a publication, but gave no opinion on the taxpayer's activity. That response is not advice under section 6404(f).

Your question also has to be in writing. If a representative asked on your behalf, the regulation counts it as your request only if the representative is an attorney, CPA, enrolled agent, enrolled actuary or other person permitted to practice before the IRS, is not disbarred or suspended, and either attached a power of attorney signed by you or had one on file.

So a phone call does not qualify for section 6404(f). Neither does a general publication, a form instruction or a web page. Those may still help you under reasonable cause, discussed below, but they do not trigger the mandatory statute.

You have to have relied on it, and reasonably

Timing matters. If the advice relates to an item on a return and you received it after you filed, the regulation says you did not rely on it. The fix is in the regulation too: if you file an amended return that conforms to the advice, you are treated as having relied on it for the amended position.

For advice that does not relate to a return item, such as advice about estimated tax payments, the advice must arrive before the act or omission that caused the penalty.

Advice about a continuing action can be relied on going forward until you are put on notice that it is no longer valid. The regulation lists what counts as notice: IRS correspondence saying the advice no longer reflects its position, or a later statute, treaty, Supreme Court decision, temporary or final regulation, or revenue ruling, revenue procedure or other statement in the Internal Revenue Bulletin that takes an inconsistent position. The regulation's example is advice that interest on a specific loan was business interest, which the taxpayer could keep relying on in later years while the facts stayed the same.

Your facts had to be complete and accurate

The regulation says no abatement is allowed for any portion of a penalty that resulted because you did not provide adequate and accurate information. It adds that the IRS has no obligation to verify or correct the information you submitted.

This is the requirement that protects the IRS from bad questions. If you described your situation incompletely and got a favorable answer, the answer covers the situation you described, not the one you actually had.

What gets abated, and what does not

Section 6404(f) removes the penalty or addition to tax attributable to the advice, and the regulation says the terms include interest imposed on that penalty. It does not remove the tax itself. The regulation's first example is direct about this: the taxpayer who followed erroneous advice to exclude an item still owes the tax and interest on it, except interest relating to the abated penalty.

That is the right result. The advice did not create the tax. It created the penalty, by leading you to report the item the way you did.

How to request it

Treas. Reg. 301.6404-3(d) lays out the procedure. File Form 843. Write at the top: Abatement of penalty or addition to tax pursuant to section 6404(f). State whether the penalty has been paid. Attach copies of:

• Your written request for advice.
• The erroneous written advice the IRS furnished and you relied on.
• Any report of tax adjustments identifying the penalty and the item related to the advice.

If the advice relates to a return item, file with the service center where the return was filed. Otherwise, file with the service center where your return was filed for the year you relied on the advice. The IRM notes that if Form 843 is not filed but the information shows abatement is warranted, the penalty should be abated anyway. Do not rely on that. File the form. The mechanics are in the Form 843 guide.

Timing: the regulation says the request must be submitted within the period allowed for collecting the penalty, or, if you already paid it, within the period for claiming a refund of it. If you paid, see recovering penalties you already paid.

Oral advice and other IRS guidance

Most wrong answers from the IRS come over the phone. Section 6404(f) does not cover them. But the IRS has extended relief administratively. IRM 20.1.1.3.3.4.2 says the IRS may provide penalty relief based on reliance on erroneous oral advice where the penalty allows relief for reasonable cause.

The manual lists the questions: did you exercise ordinary business care and prudence in relying on the advice, was your situation clearly associated with the advice and the penalty, what is your tax history and experience, and did the IRS provide correct information by other means, such as forms and publications?

That last question is the hard one. If the form instructions said one thing and the phone representative said another, the IRS will ask why you followed the phone call.

The manual also lists the documentation that supports an oral advice claim: a note of your question, documentation of the advice, the office and method by which you got it, the date, and the employee's name. In practice, that means taking notes during every IRS call: date, time, number called, the employee's name and ID number, and what was said. The IRM also says that taxpayers who fail the section 6404(f) test for written advice may still qualify under reasonable cause if they exercised ordinary business care in relying on it.

Where this fits

In the IRS's order of relief, section 6404(f) is a statutory exception. It comes ahead of administrative waivers and reasonable cause. If your facts fit, lead with it. If they do not quite fit, present them as reasonable cause and say why your reliance was prudent. The relief categories guide explains the order. For help evaluating a claim, see penalty abatement at getirshelp.com.

And when you want the IRS's answer to count, ask in writing.