If you find yourself with a notice in hand from the IRS, you will likely see a penalty or two assessed on your account. Often IRS penalties will add a significant portion to the total amount you need to pay. Relief from these penalties can be obtained and it is best to consult with a professional to discuss the particulars of your case and see if you qualify to receive a lessened penalty or if the penalty may be removed entirely. A quick note, there are some programs available from the IRS for first-time issues and other situations. This article will focus on reasonable cause defenses, but it’s best to consult with a professional to determine if there’s a better way to obtain relief from a particular penalty.
The Tax Code sections that create penalties will normally, but not always, include exceptions to provide relief from those penalties. Normally the language states that a penalty is properly assessed as long as the failure was due to reasonable cause and not willful neglect.
Often when discussing penalties with my clients, they have done a little research and say that because they didn’t willfully neglect paying or filing their tax return, it should be a done deal. They are convinced this requirement is an easy win.
Unfortunately, it’s just not that easy. Reasonable cause is a phrase that has a special meaning in the context of penalty assessments. It basically requires that a taxpayer act as a normal business person would under the same circumstances.
So What, Specifically, is Reasonable Cause?
Several situations satisfy the reasonable cause rubric. If a taxpayer, for instance, relied on a professional to assist them with their tax obligations, the IRS will sometimes abate the penalty. Fires, floods, and other natural disasters can also, under some circumstances, provide a basis for relief. Death and serious illness are also factors the IRS will consider.
Generally, a taxpayer attempting to obtain relief due to one of these explanations will be required to rectify the situation as soon as the underlying reason is no longer an issue. For instance, if the taxpayer was in the hospital and could not satisfy his or her tax obligations, he or she would need to file and pay the taxes very soon after getting out of the hospital to qualify for penalty abatement.
What is not Reasonable Cause?
Some clients ask me to help them get these penalties abated, but the facts surrounding their case disqualify them. Some examples I have seen include: forgetfulness, ignorance of the law, or simply that a mistake was made. While everyone makes mistakes and not everyone is familiar with the details of the Tax Code, the IRS nonetheless will stand firm on any penalties if these defenses are offered. The IRS reasons that being forgetful or making a mistake is not acting as a normal business person would have acted under the same circumstances. The taxpayer, in other words, has not shown reasonable cause for the failure.
Is this clear as mud? As I mentioned in another article, the IRS could assess 14 penalties in the 1950’s. Today they can assess more than ten times that number. Unfortunately, the rules surrounding penalty abatements are just as complex as the rules that create the penalties themselves.
If you are interested in pursuing relief from penalties you should discuss your case with an experienced professional. After learning the details of your situation, a professional should be able to assess the potential success of one of these requests with the IRS and inform you whether it is worth exploring. At Business Innovation Group we routinely ask for penalty abatements in conjunction with handling other matters such as setting up a monthly installment agreement or offer in compromise. I highly recommend you reach out to one of our experienced attorneys to discuss your specific situation.