Reasonable Cause: The High Standard for Penalty Relief

What is reasonable cause?

The IRS imposes penalties for various infractions, including late filing, late payment, and accuracy-related penalties. Generally, taxpayers must demonstrate that their error or omission was due to reasonable cause for the IRS to grant a penalty abatement. Part 20 of the Internal Revenue Manual (IRM) provides a definition of reasonable cause as well as a list of certain scenarios in which reasonable cause may be found. According to IRM 20.1.1.3.2, “reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligations but was nevertheless unable to comply with those obligations.” When making a determination regarding reasonable cause, the IRS will consider all of the facts and circumstances, including the taxpayer’s reason, compliance history, length of time between the event that caused the noncompliance and the subsequent compliance, and circumstances beyond the taxpayer’s control. A good history of compliance and a demonstration of a reasonable effort to become compliant will significantly increase a taxpayer’s likelihood of penalty abatement.

Common reasonable cause scenarios

The IRS has listed the following scenarios as ones that may qualify for reasonable cause relief:

1. Death, serious illness, or unavoidable absence

In these situations, taxpayers must be able to show that they were unable to meet their tax obligations due to death, serious illness, or unavoidable absence. However, when making a reasonable cause determination, the IRS will consider whether the taxpayer made reasonable efforts to comply with the law after the illness was resolved.

2. Fire, casualty, natural disaster, or other disturbance

A fire or natural disaster may be a reason for reasonable cause relief. However, merely being impacted by a fire or natural disaster will not automatically constitute reasonable cause. The taxpayer must show that the fire or natural disaster affected their business and hindered their ability to comply with the law.

3. Inability to obtain records

The IRS will consider factors such as whether the records were necessary for compliance, the steps the taxpayer took to obtain the records, why the records were unavailable, and whether the taxpayer promptly became compliant when the records became attainable. However, reasonable cause in this scenario may be difficult to prove because maintaining records is generally consistent with ordinary business care and prudence. See Rogers v. Commissioner, T.C. Memo 2018-53 (2018).

4. Erroneous advice from the IRS or a third-party professional

Reliance on erroneous advice from an IRS employee or a tax professional may constitute reasonable cause. However, the taxpayer must still demonstrate that they exercised ordinary business care and prudence. Notably, the duty to file one’s tax return is considered a non-delegable duty. Merely relying on a professional to file or mail a return will not constitute reasonable cause. See United States v. Boyle, 469 U.S. 241 (1985). Further, relying on a professional’s advice regarding deadlines to file tax returns and information returns will not constitute reasonable cause when the deadline is clearly stated in the Internal Revenue Code. However, relying on a professional’s erroneous substantive tax advice, such as whether the taxpayer has a filing requirement, may constitute reasonable cause, provided that the taxpayer acted with ordinary business care and prudence. See Estate of Paxton v. Commissioner, 86 T.C. 785, 819-20 (1986).

How to request penalty abatement?

Taxpayers can request penalty abatement by filing Form 843, Claim for Refund and Request for Abatement. It is very important that taxpayers thoroughly explain all of the relevant facts that give rise to their reasonable cause claim. Taxpayers can include additional pages outlining their narrative of the facts. Taxpayers should also substantiate their facts with exhibits, which may include anything that would help the IRS in understanding their claim, including business records, health records, or court records. The IRS may request additional information and records from taxpayers in order to make a determination on their claim.

What if you don’t qualify for abatement based on reasonable cause?

If a taxpayer does not qualify for reasonable cause relief, they may qualify for First-Time Abatement (FTA) if they have not been assessed penalties for the prior three years and are up-to-date with the filing of their tax returns. Taxpayers may also explore collection alternatives such as Offers in Compromise and Installment Agreement.

Conclusion

Simply put, when filing for reasonable cause relief under any scenario, the taxpayer must be able to demonstrate that, despite their reasonable efforts to comply with the law, they were unable to do so. Reasonable cause is a high standard, and generally requires that taxpayers acted reasonably before, during, and after their noncompliance occurred. Other options may be available for those who do not qualify for reasonable cause relief.

The attorneys at The Wilson Firm can help taxpayers evaluate their odds for reasonable cause penalty abatement, draft arguments for reasonable cause relief, and advise on other collection alternatives and avenues for relief. Contact the attorneys at The Wilson Firm today for help in resolving your tax issues.