How to Appeal an IRS Penalty (A Real-Life Example that Worked)

By all accounts, I’ve been a diligent taxpayer for the last decade plus – never a late fee, never a need for extension, never a penalty, never an audit (or reason to be audited). So, I was pretty shocked when I received a “CP14 notice” from the IRS, alleging that I had a penalty due to a dishonored payment.

As soon as I saw the letter addressed from the IRS, I knew exactly what it was for. I had sent in a check payment for quarterly estimated taxes due. Before sending the check, I had looked at my checking account to make sure that I had enough to cover the payment. Indeed, I had plenty to cover the withdrawal, but then I brilliantly wrote a check from the wrong checking account, which had insufficient funds to cover the withdrawal.

Days later, I called the IRS and was able to get through to an agent to get their advice. Since the tax was due later that week, the IRS agent’s recommendation was that I use their IRS Direct Pay service (one of the ways you can pay your taxes online, though these days I prefer to pay taxes with a credit card) to do an ACH withdrawal so that my 2nd attempt at payment was not late, as he stated:

It’s already been 4 days, so we won’t try to re-run your check, just go ahead and do the Direct Pay so your payment isn’t late.

I did. And I thought all I would be left with was an insufficient funds fee from my bank for overdrawing.

Then, later that day, a 2nd attempt on my previous check was made. It went through (I had moved funds over, just in case this happened). So I put a stop payment on the ACH withdrawal before it cleared.

After receiving the penalty notice from the IRS, I did some research and found the following statement in IRS topic 206 for dishonored payments:

If your check or other commercial payment instrument is resubmitted and there are sufficient funds in your bank account to cover it, the check will be paid and not returned to the IRS, so you won’t be charged the dishonored check penalty.

There it is!

Whether the IRS was assessing this penalty because the first attempt at the check had insufficient funds or because I put a stop payment on the Direct Pay, I wasn’t quite sure. But I had statements from their own documentation that backed me up for a penalty relief appeal for either possible scenario.

So I quickly wrote up an appeal letter, printed off all documentation, and sent it all back in the reply envelope, with the payment stub. I left no room for doubt or laziness to rule in my favor. Here is the letter I sent:

4/9/15

To Whom It May Concern:

I am writing to request penalty relief of $XX, which was assessed for a stop payment made in January for Q4 2014 1040-ES payment.

Timeline of events:

• 1/12/15: Check 1125 for ES Payment was returned
• 1/14/15: I called IRS for advice and was instructed to make Direct Pay
• 1/14/15: IRS Direct Pay payment online initiated
• 1/14/15: Resubmitted check 1125 payment deducted
• 1/15/15: Stop payment of IRS Direct Pay payment made
• 4/7/15: Penalty assessment of $XX received for stop payment

IRS Topic 206 states:

“If your check or other commercial payment instrument is resubmitted and there are sufficient funds in your bank account to cover it, the check will be paid and not returned to the IRS, so you won’t be charged the dishonored check penalty.”

It also states, “Penalty is not assessed on checks or other payments for which a stop payment order has been requested. If a penalty is assessed, please send a copy of the stop payment request, along with your request for penalty relief to the address on the notice”

I have included

1. the penalty notice I received.
2. the stop payment request.
3. Topic 206 with the above quotes highlighted.

Please confirm written relief of the $XX assessed penalty. Thank you.

Almost 6 weeks later, I received a letter from the IRS stating,

Dear Taxpayer:

Thank you for your inquiry dated Apr. 09, 2015.

We are removing the penalty based on your explanation of why you paid your tax late.

Technically, I didn’t pay my tax late or get a penalty because of that, nevertheless, IRS penalty relief was achieved!

Now, I don’t expect that you will encounter the exact same scenario that I did, however, I think there are a few important takeaways here that may aid you in any dispute, appeal, or penalty relief scenario that you have with the IRS.

1. Do your research: don’t assume that just because you got a letter, the IRS is right. Had I just taken their word for it, I would have sent them a penalty payment instead of appealing, and probably never seen that money again.
2. Back up your appeal request. Document everything, in written and electronic form and don’t be lazy. Given how underfunded and understaffed the IRS is these days, make it easy on whomever receives your request by providing clear and full documentation. If they have to jump in the IRS manual to back up your claims, you’ve probably already lost.
3. Follow IRS recommendations. This IRS appeal guide is fairly straightforward. Follow it to a T.

Your mileage may vary on the result, but I can only see these two steps helping your case.

Have you had a similar experience with the IRS on an appeal? What is your advice?

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• Tax Deadline & Other Important Tax Season Dates
• How to Check your Tax Refund Status
• 7 IRS Audit Red Flags