IRS penalty- Settle or proceed to litigation?

[Anonymous]

Help me think this through and make a decision. 

Background: Four years ago, I made a first-time honest mistake in the 25+ years that I've been a taxpayer.  I was supposed to submit 2 forms to the IRS- one that was due on April 15 and the other one due on Oct 15. I got the deadlines mixed up and didn't realize until I was about to submit the Oct 15 form that the first one had to be submitted first.  I had not used a CPA before because my taxes were fairly simple.  This concerns an international matter, I was reporting a gift that had occurred overseas.  

As soon as I realized my mistake, I consulted a CPA who said I should go ahead and submit the 1st form and "see what happens, you might get about a $10k fine, just let us know when you hear back and we'll help you out." 

The IRS wrote me back 1.5 years after I had submitted my late form, with a 40k fine (including interest). CPA wrote a letter on my behalf saying this was a first-time mistake, also explaining that even their accounting firm only processes these kinds of forms very rarely and that regular citizens would find it confusing. The letter got rejected. IRS still wants to impose the $40k fine. 

I consulted with a Tax Attorney who has 40+ years of experience in international compliance law. Tax Attorney said this should be a simple matter, and submitted another form requesting for an abatement of the penalty because I qualified based on my clean record from the last 3 years, along with other attorney-speak. The tax attorney said he is very confident that I'd get a full abatement. 

IRS referred us to an Independent Appeals Officer and we had our discussion in a phone conference. The point of the conference was to go over the facts and see if the law applies to my situation.  The Appeals Officer is not part of the IRS and their job is to settle cases out of court. This Officer is a CPA, not an attorney.  The Appeals Officer said he'd have to consult with his Coordinator (who is with the IRS and probably not an attorney) to make sure they are in agreement.  

Their decision:  They are reducing the penalty to 20k.  

My options: 
1) Pay the 20k  
2) Go to litigation 
3) Try to negotiate 

If I pay the 20k, I'm done.  The Appeals Officer will not provide a justification for how the law was applied. That will only be explored if this case goes to court.  My Tax Attorney doesn't think I should agree to the 20k, which I agree with as well. 

If we go through litigation, I first have to pay the $40k, then sue for a refund. Tax Attorney estimates a 70% chance of getting a full refund because if the case goes to court, it will be reviewed by attorneys who will see that I do qualify for the abatement.  Neither the Appeals Officer nor the Coordinator is an attorney.  My Tax Attorney will cap his success fee at $9k. If we lose the case and I had to pay the $40k, my Tax Attorney gets zero. So far, I have spent $4k on the Tax Attorney, and about $1k on the first CPA who wrote the letter.

What would you do? 
If you were going to negotiate, how would you negotiate?
For those who have experienced IRS litigation, how did it turn out for you?

Thank you for reading and listening, and for your collective input, DCUM. I really appreciate your support.

[Anonymous]

Was it the GILTI form perhaps? That one is a pain to fill out.

My gut says at most, the IRS will drop it to the one year penalty which is $10k, so you'd be looking sat $10k + $9k lawyer's fees (and years of hassle on your side while this goes to court) vs $20k to settle now. I'd say just settle.

[Anonymous]

Also how big was the gift? I may be in a similar situation.

[Anonymous]

Is this $20K life altering to you or just a decimal point?

[Anonymous]

I would ask for a payment plan to pay the $20k. The first CPA estimated you would have a $10k fine. It has been a few years since then. The $20k fine seems reasonable given the circumstances and it includes penalties and interest.

[Anonymous]

It sounds like you agree you screwed up but think you should get a pass because it was inadvertent and a first time mistake.

I think that would probably be fair in your case but I really wonder if the time for that is before the IRS. I don’t think it’s up to the Tax Court to say “gee this seems like a big penalty for someone’s inadvertent mistake”— it’s their job to apply the law.

So I am a little sceptical of your tax attorney’s assessment, although maybe they have more money on the line than I do or you’ve left something out.

[Anonymous]

Don't make a decision by crowd-sourcing with to a bunch of nobodies. You have competent counsel. Rely on them.

[Anonymous]

Anonymous wrote:Was it the GILTI form perhaps? That one is a pain to fill out.

My gut says at most, the IRS will drop it to the one year penalty which is $10k, so you'd be looking sat $10k + $9k lawyer's fees (and years of hassle on your side while this goes to court) vs $20k to settle now. I'd say just settle.

Agreed completely with this, anything so you can move on.

[Anonymous]

Sounds like an FBAR.

[Anonymous]

Is it the 3250 to disclose a gift from a foreign person? Has there been any case law on this? If you go to litigation, is there a chance the IRS tax counsel will settle for less? Plus you will have your attorney’s fees. Is there a way your attorney can push back at Appeals? I can’t imagine that the Appeals Officer wants to have this go to litigation but who knows.

[Anonymous]

How much of that $20k represents interest?

[Anonymous]

FBAR ? do you have a lot of money to report?
We missed this form also for a few years but have never heard from IRS, we have a relatively small balance Around 50k

[Anonymous]

Of course the tax attorney likes the idea of you litigating this. Discount the advice accordingly.

[Anonymous]

Anonymous wrote:It sounds like you agree you screwed up but think you should get a pass because it was inadvertent and a first time mistake.

I think that would probably be fair in your case but I really wonder if the time for that is before the IRS. I don’t think it’s up to the Tax Court to say “gee this seems like a big penalty for someone’s inadvertent mistake”— it’s their job to apply the law.

So I am a little sceptical of your tax attorney’s assessment, although maybe they have more money on the line than I do or you’ve left something out.

I momentarily thought that maybe I should just not file it but I knew it was the right thing to own up to my mistake, even given the initial penalty that the CPA told me.

I was encouraged at first when I consulted with the Tax Attorney who said I qualified for the Abatement, and they did refer to the law that covers gifts. The Office of Independent appeals asked me if the money was from a Trust, and I said no, because it is not. Apparently, the abatement can cover gifts, but they cannot cover trusts. The Tax Attorney did say that there have been publications in tax law regarding removing the abatement for gifts but that decision has not been finalized- which is why my Tax Attorney also wants to litigate this to argue the current law.

[Anonymous]

Oops- I forgot to mention that I am OP- from the post above at 15:19. Just quoting the messages here so I can respond.