Episode Overview

Podcast: How Tax Works
Host: Matthew Foreman, Co-Chair of Falcon Rappaport & Berkman’s Taxation Practice Group
Episode Title: Payment Plans and Penalty Abatement
Release Date: December 8, 2025

In this episode, Matt Foreman explores the options available to taxpayers who owe money to the IRS or state tax authorities. The discussion centers on two main remedies—payment plans and penalty abatement—breaking down how each works, qualifications, procedures, and strategic insights. The episode also touches on how interest and penalties accrue, the statutory framework, and what constitutes reasonable cause for penalty abatement. The companion episode will focus on "offer in compromise" as a collection alternative.

Key Discussion Points & Insights

1. Setting the Scene: Assumptions and Scope

• This episode assumes tax returns are filed, audits (if any) are complete, and the taxpayer owes the assessed tax.
• The focus is on payment plans and penalty abatement—not legal contesting of tax liability.
• "Generally, interest is statutory and cannot be abated. Penalties can be abated." (03:14)

2. Interest and Penalties: Structure & Effects

• Interest: Statutory, cannot be abated except in rare cases (e.g., IRS administrative delays).

• Penalties: May be abated; not all penalties are eligible.

• Some penalties are flat fees (e.g., Form 5471 late filing: $10,000 per violation).

• Interest and penalties compound on one another, quickly increasing the taxpayer’s burden.

  • “If you owe $10,000 after like five years, you know you're going to owe $20,000 with interest and penalties. So the numbers really go up.” (04:32)

• Special note for New Jersey: Unlike the IRS and most states, New Jersey requires explicit request to reduce interest when penalties are abated. (03:58)

3. Payment Plans: Mechanics and Procedures

(Starts at ~06:15)

a. During or After Audit/Appeal

• Easier to set up when dealing directly with an auditor or appeals officer.

• Often negotiated post-audit for liabilities up to $100K–$200K and structured over 12 months or so.

• “Payment plans are much, much, much, much, much easier when you're dealing with someone directly.” (06:40)

b. Without Ongoing Audit

• Must make a formal request.

• IRS Form 9465: Used for amounts under $50,000 (no financials usually required).

• Up to $1 million: Can use practitioner priority line, generally need to supply financials (bank accounts, assets, cash flow).

• Over $1 million: Revenue officer assignment is required; formal financial disclosure and negotiation involved.

  • “A million dollars or more, you must have a revenue officer assigned.” (07:43)

  • “I have a client, for example, owes over $1 million and we're trying to put him in a payment plan and then request penalty abatement. Can't request penalty abatement until you're in a payment plan. And it has been at least four, possibly now six months. And things are just kind of ticking along.” (08:07)

• IRS administrative delays in processing can support a request for interest abatement.

c. Required Financial Information

• Bank accounts, significant assets (houses, cars, jewelry), full cash flow overview (income less expenses).
• Down payments are often required for larger balances.

d. Sequence for Penalty Abatement

• Penalty abatement can typically be requested only after entering into (or completing) a payment plan.

4. Penalty Abatement: Types, Process, and Reasonable Cause

(Starts at ~08:52)

a. Types of Penalties Subject to Abatement

• Common penalty reasons:

  • Late filing, late payment, late payment after demand, negligence, civil fraud, failure to deposit/pay, valuation misstatements, trust fund recovery, information return failures, aiding/abetting understatements, preparer penalties, and more.

• “What penalties exist? Right? There can be penalties for a lot of stuff. And I'm just going to rip through a list because I think it's actually helpful to talk about what can be there because different penalties exist for different reasons.” (09:03)

• Civil and criminal penalties coexist; criminal cases (like ex-athletes Pete Rose and Darryl Strawberry) often include hefty penalties.

b. First-Time Abatement (FTA)

• Forgives penalties for failure to file, pay, or deposit if the taxpayer has no similar penalties in the prior three years—no need for reasonable cause explanation.

  • “First time abatement is really, really friendly… It’s for certain penalties: failure to file, failure to pay, and failure to deposit only. And they're abated if there's no penalty for the same within three years for the same reason.” (10:45)

  • IRC Policy: IRM 20.1.1.3.3.2.1, PMTA 2018-2, CCA 2014017.

c. Reasonable Cause Abatement

• If FTA is not available, must show underpayment was due to “reasonable cause” and not to “willful neglect.”

  • Examples covered by statutes: IRC sections 6651, 6652, 6686, and 6664.

• “You must affirmatively show both [reasonable cause and no willful neglect]. That's really important.” (12:10)

5. What Constitutes Reasonable Cause?

(Starts at 15:00)

• Definition: “Ordinary business care and prudence” (Treas. Reg. 301.6651-1(c); Atlas Therapy, N.D. Alaska, 1999).
• There is no precise statutory definition, but extensive case law and examples exist.

a. Valid Reasons for Reasonable Cause

• Illness, disability, or death of taxpayer/immediate family.
  • “I'm sorry, I couldn't do it. I was in a coma for six months. Absolutely.” (16:12)
• Serious household disaster (fire, flood—if not already covered by federal disaster relief).
• Inability to obtain records (if you can show good faith effort, e.g., partnership dispute).
• Reliance on a competent tax advisor (must have provided all material info to the advisor).
  • “One of the big ones is reliance on competent tax advisors. Competent tax advisors, competent. Okay. Hiring someone who is incompetent is not helpful.” (20:40)
• Changes in Forms or unclear IRS instructions.

b. Common Misconceptions/Invalid Reasons

• Imprisonment/incarceration is not generally reasonable cause (George v. Commissioner, 2019).
• Lack of funds rarely qualifies unless paying taxes would create documented, undue hardship.
  • “...if you own a yacht and the yacht’s just cost so much to operate, that’s not a reason to not pay the IRS.” (18:22)
• Ignorance of the law is insufficient alone, except in rare circumstances (e.g., odd filing requirements with no tax due, as with Form 3520).

c. Specific Case Examples & Precedents

• Reliance on a computer system: Must show it was used and used correctly (Dealer’s Auto Auction, TC Memo 2025-38).
• Oral IRS advice: Generally does not qualify; written advice under specific circumstances may suffice (IRC 6404(f), Treas. Reg. 301.6404-3(a)).

d. Procedure and Discretion

• The IRS (and some state agencies) have broad discretion in applying reasonable cause.

• Abatement successful if both qualification prongs are met and supporting documentation/affidavits provided (for advisors, etc.).

  • “If the IRS is viewed... as willing to abate penalties, I think more people would come forward and pay their taxes.” (12:40)

Notable Quotes & Memorable Moments

• On compounding penalties:
  • "Interest and penalties will accrue on interest and penalties. So that's a really important point that I always do it." (03:58)
• On IRS operational realities:
  • "The IRS, as I've said earlier, on this is having a moment. It's struggling a bit." (07:53)
• On penalty abatement philosophy:
  • "I'm of the opinion that you should incentivize people to come forward and pay taxes and you can do you get reasonable cause for abatement." (12:40)
• On the blurry line of reasonable cause:
  • "There is no actual definition of reasonable cause in the Internal Revenue Code or the regulations. The Internal Revenue Manual actually says that this is on purpose." (15:12)
• On lavish lifestyles not excusing nonpayment:
  • "What they always are, are people who owe money to the IRS but are going on vacations to Turks and Caicos twice a year. And like, I just didn't have money, you know, my lifestyle's so expensive. The kid needed a yacht. Right?" (18:38)
• On Form 3520 ignorance:
  • "That one’s one where ignorance of the law is actually really helpful because you're like, Jesus. And I've written these where I say this is a quirky penalty, right?" (19:30)

Suggested Timestamps for Key Segments

• Intro & Episode Context — 00:11
• Interest & Penalty Accrual and Strategy — 03:10–05:00
• Payment Plan Options and Process — 06:15–08:50
• Examples of Real-World Payment Plans — 07:00–08:30
• Penalties Overview & Abatement Types — 08:52–12:00
• First-Time Abatement Explained — 10:45–11:30
• Reasonable Cause: What Works and What Doesn’t — 15:00–24:30
• Case Examples and Tax Advisor Reliance — 20:25–21:40

Final Notes & Closing

Matt Foreman will cover offers in compromise in the next episode, promising a deep dive into this collection alternative. He encourages listeners to reach out with questions and reminds them that his advice is for informational purposes only.

For those in tax controversies:

• Entering a payment plan early reduces penalty/interest exposure.
• Know which penalties you can petition for abatement.
• Prepare to document financial status and, if seeking abatement, why your situation is unique or reasonable under IRS doctrine (not just "couldn't afford it" or simple oversight).

Matt’s parting wisdom:
“Hope you enjoyed it. Hope you learned something. Possibly more importantly, possibly less importantly. I'll be back in two weeks with the 42nd episode...” (27:00)