Learning How to Get the IRS to Waive a Nonprofit Late Filing Penalty

It’s going to happen. At some point, you or your boss is going to get the following sob story from a client.

Dear My Favorite CPA (when its starts this way you know you are in trouble – heh),

I know that you only prepare my individual and business tax returns. But I really need your help. I am on the board of directors of a charity that just got an IRS notice which says we owe them $30,000.

We did not discover until recently that the prior controller did not file last year’s Form 990 tax return and the IRS wants $100 per day in penalties. The letter also says if the amount is not paid then the IRS will put a lien on our assets. Help.

(FYI, the letter will also say that they can’t afford to pay you much and it infers that if you cant get it waived that they don’t want to pay you at all)

Step 1: Tell your client to relax

Let them know that the IRS is not going to show up like the Men in Black to take the charity’s assets. As long as the client responds to each letter, it is a slow road through the IRS bureaucratic process.

Step 2: Get the client to complete Form 2848.

Form 2848 will allow you to talk to the IRS on the client’s behalf. Unlike other tax notices, you will not use the CPA hotline to call the IRS. The IRS has a separate group for handling nonprofit tax issues. You can call them at (877) 829-5500 (see link for other contact info).

Step 3: Inform client of the following points

• No phone waivers. The IRS will not waive the penalty on the phone. They always want the request to be in writing. As part of this tax waiver process, you are going to call the IRS. But it is merely to get the IRS agent to place a 60 day hold on any IRS lien proceedings. Once the IRS receives your waiver request (sent within the 60 days requested on the phone), the IRS will suspend all lien activity related to the IRS penalty notice until the IRS has made a decision on the waiver request.
• Second IRS notice coming. The charity will receive a second IRS notice requesting payment on the penalty notice. It does not matter how fast you call the IRS. The IRS computer system is going to send the second notice. If you got the IRS to agree to the 60 hold then they are fine. Tell them to send you a copy of the notice and not worry about it.

Step 4: Write the letter

The letter only needs to be about a page and should include the following information.

• Request the waiver of all penalties and interest
• Reason for the delay. Give any good reason that you have. But there is no reason to go overboard. If it was due to a change in personnel or a clerical error then just admit it. The idea is to explain the error was not intentional.
• If it works in the favor (i.e. less than 5) then mention that the organization is small with essentially no paid employees.
• If it works in their favor then mention that the charity has a good history of filing their tax returns on time.
• Indicate that the charity has put in place procedures to prevent a late filing of the tax return in future years.

Sample Penalty Waiver letter

If you need an example copy of a successful letter (it’s free) then click the following Advice for Tax Preparers – Nonprofit Waiver Letter link.

If you find the letter helpful then I ask that you do the following things:

1. Forward it to nonprofits that you think would benefit from it.
2. Forward it to CPAs that could help other nonprofits get a waiver from the IRS.
3. Use the social media buttons on this page to like my artcle on Facebook and LinkedIn.
4. I will be publishing a book that teaches tax preparers how to succeed in a public accounting firm. Therefore, I hope you will tell any current or future accountants you know about my blog so they can learn from my posts and possibly buy the book when it is published.

It is going to take at least a couple of months to resolve the issue. But if done correctly the chance of a first time offender getting the penalty waived is over 90% (at least in my experience).

If you found these tips helpful please consider sharing this post with your friends on Facebook, LinkedIn and Twitter. Thanks.

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Bill Meador, CPA, JD

Bill Meador is a CPA and lawyer who has worked in the tax departments of public accounting firms for over twenty years. He created this blog to make Big 4, national, and local tax preparers lives easier. If you like the blog then tell your friends and keep on the lookout for the Tax Preparer Skills Guide which will teach tax preparers the tax, technical, office and social skills needed to succeed in a public accounting firm.

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