All rights reserved. No part of this report may be reproduced in any form or by any means, electronic or mechanical, including photocopying, or by any information storage and retrieval system, without permission in writing from the publisher. Copyright 2007, 2008, 2009 David B. McRee. Publisher: David B. McRee, CPA, St Petersburg, Florida. Author: David B. McRee, CPA Inquiries should be made to: email: cpa@form990help.com phone: 727-345-4288 Your responsibility I have done my best to provide you with useful and accurate information. I do not and cannot guarantee that you will be successful in having penalties abated by using the information contained herein. Laws and procedures change frequently and are interpreted in different ways by different persons. For legal or accounting advice regarding your specific situation, consult with an attorney or Certified Public Accountant. It is your responsibility to make sure the advice contained in this book is applicable to your situation.
Author's Note In 1996 I took a job working for a local St. Petersburg CPA firm that specialized in audit and tax work for nonprofit organizations. Most of my time was spent preparing Form 990 for organizations of all sizes. Once in while, after we prepared a Form 990 and sent it to the client for signing and mailing to the IRS, the client would simply forget to file the return by the due date. Thus I was introduced to writing penalty abatement request letters. Over the years I got to be very good at getting penalties abated. In 2005, I left the firm to go out on my own to pursue other interests. It wasn't long before my phone started ringing. Organizations heard that I knew how to prepare Form 990, Form 1023, and how to deal with IRS penalties. Since I now had extra time, I began to seriously study the law, rulings, and IRS guidance on penalty abatement for nonprofits. After having some very rewarding successes with several clients that were facing extremely large penalties for late filing, and who had already received intent to levy notices, I decided that I could best help by writing down the successful techniques I use to request penalty abatement. And that's how this penalty relief manual was born. I am totally confident that it will help you. I know that spending money for an e-book from someone you've never heard of can be hard to do. There is the matter of trust. And, many nonprofits simply do not want to pay. In reality, this book is an extreme bargain. Just read the testimonials on my website. Remember, you are not paying for words on paper when you buy a book like this. You are buying a solution to your problem. What does your CPA or attorney charge for several hours of his or her time? What is your time worth to you? If you spend 2 hours of your own time searching the Internet for free advice, have you really saved anything? I've created this 13-page excerpt from the manual to help you see how it can help you solve your problem and save you a fistful of money, save many hours of your time, and maybe even help you sleep better tonight.
IRS Form 990 Late Filing and Failure to File Form 990 Penalty Abatement Abatement, n. 1. alleviation; mitigation. 2. suppression or termination: abatement of a penalty. Abate, v. 1. to make or become less. 2. (legal) to end. Congratulations on your efforts to stand up to the IRS! Many people do not know it, but the IRS abates a large percentage of all the penalties that it assesses. So you've got a really good chance if there is a reasonable cause for your late or non-filing. I've run into quite a few CPA's that do not know how to make a solid reasonable cause argument for a nonprofit organization. If your organization receives a penalty for late filing, but you believe that there is a reasonable cause (defined in this report) for being late, and your CPA or other advisor tells you to just pay the penalty, you need to either get a new advisor or take matters into your own hands. My belief is that unless you or your organization DELIBERATELY, KNOWINGLY, and WILLFULLY neglected your filing obligations and filed late, or failed to file, you should be eligible for relief under the reasonable cause provisions discussed in this report. If you are a CPA, attorney, nonprofit executive or director, or other responsible person, you should understand that the IRS tends to be more lenient when it comes to nonprofits. So you should never just pay the penalty if there is any chance to make an argument for reasonable cause. By reading this report and adopting some of the tried and true language that I have used over the years, you have a very good chance of having the penalties abated. This is also a good opportunity to become educated as to the filing requirements and deadlines and as to the various other penalties that can be assessed against tax-exempt organizations by the IRS. It goes without saying that donors to your cause do not expect that their generosity will be used to pay IRS penalties, so diligence in this area is of utmost importance. Here is a typical scenario. A small, all-volunteer charitable organization works hard every day
to stay afloat and do good. One day they either receive a late filing penalty notice from the IRS, or a new director comes into the organization and discovers that a required Form 990 was not filed, resulting in a penalty notice once it is filed. Now the organization has a penalty notice and thinks I don't want to deal with this, we don't have any money. The notice gets shuffled aside, procrastination ensues, and more notices come, each more threatening than the one before. What has happened here is that the organization has taken a very workable situation and made it worse through procrastination and fear. Never ignore the IRS. They won't forget. Your penalty notices are in their computer, which spits out the next notice without depending on the memory of a human. It's automated. Note: Parts of this report can get a bit technical and detailed. Some readers want more detail than others so I've tried to strike a balance and I've tried to simplify the language where possible. I'm assuming that you are comfortable with writing a professional letter and are able to take the examples I'm giving in this report and, using the particular facts and circumstances that reflect your situation, can make a logical reasonable cause argument based on those facts. If not, perhaps you should engage the services of a professional. Note 2: IMPORTANT...Section 1223 of The Pension Protection Act of 2006 has made a major change in the way the IRS deals with chronic non-filers. Beginning with 2007 Forms 990, 990- EZ, and the new Form 990-N, any organization that fails to file one of those types of returns for three years in a row will AUTOMATICALLY lose its tax-exempt status, effective on the last date the organization could have timely filed its third required information return or submitted Form 990-N. The only way to get it back is to reapply (which as you know can be very expensive). Retroactive reinstatement (back to the date of revocation) of tax-exempt status is possible if your organization reapplies (by filing Form 1023 or Form 1024) and can show reasonable cause for failure to file timely. To make things worse, even if your organization was not required to apply for recognition of
tax-exempt status with the IRS because it normally has revenues of less than $5,000 annually, it still must file form 990-N beginning with its 2007 tax year. Failure to file the required form for 3 years in a row will result in loss of tax-exempt status and it will have to apply to the IRS to have it reinstated! This does not to apply to churches. Churches are exempt from the Form 990 filing requirements and from Form 1023 application requirements. CPA's Requesting Abatement on Behalf of Clients If you are a CPA, attorney, or other third party representative of the filer, you don't need a power of attorney to write a reasonable cause letter on behalf of the organization.(however, if you call the IRS, the IRS will not give you any information specific to that client or take any requested action without you having a Power of Attorney Form 2848 on file for that client.) The following guidance is from the IRS Penalty Manual: In the interest of fairness, the Service will consider requests for penalty relief received from third parties, including requests from representatives without an authorized power of attorney. While information may be accepted, NO taxpayer information may be discussed with a third party, unless a power of attorney or other acceptable authorization is secured in writing from the taxpayer. a. If additional information is needed, contact the taxpayer or the taxpayer s authorized representative. b. If the validity of the request is questionable, contact the taxpayer. c. In all cases involving third party requests for penalty relief, advise the taxpayer of the request and the action taken. What if it's YOUR (the CPA's) fault? If you are a CPA or other professional engaged to prepare Form 990 and extensions for a client, and if YOU forgot to file for an extension or missed a filing deadline because of a glitch in your filing deadline tracking software (or some other good reason), do not despair (and don't write a check to the IRS). The same reasonable cause argument available to Form 990 filers is
available to you as long as you can convince the IRS that you acted responsibly, etc. Later in this report I give example arguments that you can use to request abatement of penalties. What penalties does this report apply to? This report is specifically focused on penalties assessed by the Internal Revenue Service for late filing of Form 990, 990-EZ, and 990-N. These penalties are codified in IRC Section 6652. The penalties also apply to exempt organizations that file an incomplete or incorrect return, although I rarely see the penalties applied to those situations even though I've seen many an incomplete and clearly incorrect return filed. I'm amazed at some of the sloppy and incomplete 990's that are accepted by the IRS. (An organization called Guidestar.org provides access on its website to copies of most 990's that have been filed, and I frequently look them over). The IRS simply does not have the mechanism in place to monitor the completeness of the Forms 990 that are filed each year, although it may sometimes focus on compliance by examining a certain number of returns to examine areas that it considers problematic. When the IRS makes changes to Form 990, it may look closely to see if organizations are properly completing the new or changed areas. Certain omissions may trigger notification of an incomplete return and a penalty assessment. Probably the most common trigger is the failure to attach Schedule B (list of substantial contributors) to the return AND failing to mark the check box on page 1 of Form 990 indicating that Schedule B was not required. Once the IRS determines that a particular return is incomplete, it often has a look at other years' returns to see if other years are incomplete. This can have a snowball effect and result in penalty assessments for multiple years. Ouch! Other penalties not covered by this report could apply to Form 990 / 990-EZ and will be noted in the appendix. You should familiarize yourself with those penalties by skimming the appendix. How much are the penalties and how are they calculated? For exempt organizations with gross receipts of one million dollars or less, the penalties are $20 per day for each day the return is late. The amount of the penalty cannot exceed $10,000 or
5% of the organization's gross receipts, whichever is smaller. Example: Children's Charity, Inc. had $50,000 in gross receipts in 2004, but failed to file a return for that year and did not file for an extension of time to file. Since Children's Charity, Inc has a calendar year-end, its Form 990 was due May 15, 2005. On December 31, 2007 the IRS discovered the failure to file and performed the following calculation in its taxpayer slayer supercomputer: Number of days between May 15, 2005 and December 31, 2007 = 961 days late. 961 days X $20 = $19,220 The $19,220 penalty calculated would be limited to a maximum of $10,000 or 5% of Children's Charity Inc's gross receipts ( $50,000 X.05 = $2,500), whichever is less. Since $2,500 is less than $10,000, Children's Charity would be assessed a penalty of $2,500 for that return. If more than one return is late, the organization will receive a penalty notice for each late return. The maximum penalty limitation applies per return. In other words, if Children's Charity had failed to file its 2004, 2003, 2002, 2001, and 2000 return, and assuming that each year's gross receipts were $50,000, the IRS could send a penalty of $12,500 ($2,500 X 5 years). The IRS is not shy about sending a large penalty assessment notice to a fairly small organization that was unaware of its filing obligation. It happens all the time. For exempt organizations with gross receipts greater than one million dollars the penalty is $100 per day for each day the return is late, with a maximum penalty (per return) of $50,000. The 5% of gross receipts limit does not apply to large organizations. And let me just emphasize that $100 per day adds up FAST!
Abatement of Penalties Abatement is the term used for penalty relief or forgiveness. The IRS says that it will abate penalties if the organization has reasonable cause for late filing. The main purpose of this report is to show you how to make a reasonable cause argument for penalty abatement. Sections and Topics Covered by the remainder of the 45 page manual include: What does the IRS say about penalty abatement? What does the law say about penalty abatement? What to do when your organization receives a notice from the IRS. (12 steps you can put into action). When to call the IRS (and when not to call). What number should you call to reach the IRS? What is reasonable cause? Mitigating factors that establish reasonable cause. (This is broader and more useful than you might think). Events beyond the filer's control. How to successfully blame your CPA or other return preparer. How is acting in a responsible manner essential for abatement and how do you show that the organization or its agent acted in a responsible manner? Guidance from the IRS Penalty Manual. Writing your letter: Establishing the facts. Crafting a properly worded reasonable cause argument. Requesting abatement. Sample letters and paragraphs proven successful. Other example paragraphs to use in abatement letters and advice for specific situations: IRS says you filed late but you know you filed on time. Organization has never filed Form 990 (multiple years) but discovered it should have been filing. Can the organization dissolve and start over with a fresh corporation to
avoid penalties? What if the organization didn't realized it met the filing requirement threshold until after the due date? What if you thought your CPA prepared a request for an extension of time to file Form 990 and later found out he/she did not? What to do if you are a CPA or other return preparer and forgot to file an extension or otherwise missed the filing deadline? What if your CPA was inexperienced and filed an incomplete or improperly completed return and now you have received penalty notices? (This happens more than you might think, and it can be time intensive to correct when multiple years are involved). Tips on dealing directly with the IRS. What happens after the IRS receives your abatement request letter? If you know you are filing your return late, should you calculate the penalty and send a check to the IRS? What if you decide you need help writing your abatement request letter? APPENDIX What are some of the other penalties that a Form 990 filer may be subject to? Following is a list of SOME, but not all, of the situations that may result in IRS penalties being assessed against a charitable organization: 1. Late filing of Form 990. 2. Failure to file Form 990. 3. Failure to file 990 T and pay tax on unrelated business income. 4. Failure to provide correct or complete information on Form 990. 5. Failure to make Form 1023 (exemption application) available for public inspection. 6. Failure to make Form 990 available for public inspection. 7. Failure to make the proper amount of estimated tax payments on unrelated business income reported on Form 990-T. 8. Failure to provide information about a termination or substantial contraction of the organization. (You have to tell the IRS what happened to the assets).
9. Fraud resulting in an underpayment of tax. 10. Willful failure to disclose information required on Form 990 or Form 1023 or 1024. The reasonable cause argument is applicable to all of the penalty situations above EXCEPT FOR number 7 and number 10. In many, but not all cases, penalties can be assessed against both the organization AND against a responsible person. My Guarantee / Refund Policy And remember, if after purchasing the book, you feel like you could have written just as effective a letter on your own without having purchased the book, I'll happily refund your money. You have 30 days to evaluate the book and request a refund. Of course, I can't guarantee the IRS will definitely abate your penalties since I don't know all the facts of your situation and I do not control the IRS. All I can guarantee is that this book will help you write a better abatement request that is MUCH more likely to be successful than if you had written it on your own without the advice given in the book. Have I ever refunded anyone's money? Yes. On two occasions. The first time was when a woman ordered the book without realizing that it is geared toward nonprofits. She and her husband owned a for-profit business and owed large penalties to the IRS (which seemed to involve payroll tax issues). After downloading the book she realized the book probably wasn't going to help her and she requested a refund. I immediately issued a refund to her and advised her to see an attorney. The second time I issued a refund was when a tax preparer ordered the manual and wrote to me requesting a refund because the manual did not contain a sample letter that specifically addressed the fact pattern that led to his penalty problem. I immediately issued a refund and asked him if he would be willing to help me improve the book by telling me what he felt was missing that would have helped him, so I could add that to the book. He agreed to do so. After several weeks he sent me an email that said he would like for me to bill him for the book again because after taking the time to actually read the entire book, he found that the book would indeed meet his needs.
Testimonials Be sure to read the testimonials on my website. They are real. I put them up as I receive them. I do not solicit testimonials. They are all voluntarily emailed to me. http://form990help.com/form-990-penalty-relief.html This is one of my favorite testimonials: Received August 25, 2008: " Mr. McRee, thanks to you and your treatise on Form 990 penalty abatement, I've been successful in getting $37,400 in penalties abated! I seem short on words, but it's a tremendous feeling opening up the letter from the IRS, searching for the Amount You Owe box and seeing NONE. Let's see $37,400 divided by $37 is about a 1,000 time return on the cost of your book. It's a great service you've provided for charities like ours. Have a great day. I know I will." from John J. Negative Feedback? Have I ever had clients complain that the letter they wrote did not work? Yes, once. The CPA's letter for abatement for his client was rejected by the IRS. The CPA represented in the letter that this was the first time the organization had filed a return late. Unfortunately this was not true. The client had previous penalties that were abated with the promise that the organization would put measures in place to prevent future instances of non-compliance. The CPA was unaware of the past instances of noncompliance penalties, since this was a new client. As most CPA's are aware, clients do not always disclose all the facts. Had the CPA known of the past instances of non-compliance penalties, he could have addressed that in the letter and might have been successful anyway, depending on the reasons for the most recent instance of late filing. The above example underscores the importance of gathering ALL of the facts, including facts about any previous IRS penalties the organization has been subject to.
Still Need More Information? If you still have questions, or are unsure if this manual will help you, feel free to send me an email with a description of your situation and I'll be happy to tell you if I think this manual will help you. Website: Http://www.form990help.com email: cpa@form990help.com David B. McRee, CPA P.O. Box 40872 St. Petersburg, FL 33743 Order and Get Help Now! http://form990help.com/form-990-penalty-relief.html