December 2018 JD Supra
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What is Reasonable Cause for the IRS? was published by JD Supra on 12/7/18.

In the US, Taxpayers “self-assess and voluntarily” pay taxes.  The IRS position is that Voluntary Compliance occurs when a Taxpayer makes a “good faith” effort to meet the Taxpayer’s tax obligations as defined in the Internal Revenue Code. IRS encourages Taxpayer Voluntary Compliance to assure compliant Taxpayers that non-compliant Tax Offenders are identified and penalized.    

Fairness of the Tax System is important.  At times, relief from penalties such as the failure to file, failure to pay and/or failure to deposit might be attributed to Reasonable Cause.     

What is Reasonable Cause?

IRS bases “Reasonable Cause” on the individual facts and circumstances of a Taxpayer’s situation. IRS considers reasons which establish that a Taxpayer used ordinary business care and prudence to meet a Federal tax obligation but was unable to do so.  While a Taxpayer’s inability to come up with the funds for tax payments in and of itself is NOT Reasonable Cause for failure to file or pay on time, the reasons for the lack of funds might meet Reasonable Cause criteria for the failure-to-pay penalty.   

Facts IRS requires for determining Reasonable Cause:

  • What happened and when did it happen?
  • What facts and circumstances prevented the Taxpayer from timely filing a tax return or paying a tax liability during the period of time the Taxpayer did not file and or pay the tax liability?
  • How did the facts and circumstances affect the Taxpayer’s ability to timely file and/or pay taxes or perform the Taxpayer’s other day-to-day responsibilities?
  • What actions did the Taxpayer take to file and/or pay taxes once the facts and circumstances changed?  
  • In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?   

While Each case is Judged Individually, “Sound Reasons” include:

  • Fire, casualty, natural disaster or other disturbances
  • Factual inability to obtain records
  • Death, serious illness, incapacity or unavoidable absence of the Taxpayer or a member of the Taxpayer’s immediate family
  • Other reasons which establish that a Taxpayer used all “Ordinary Business Care and Prudence” to meet Federal tax obligations but was unable to do so

What is “Ordinary Business Care and Prudence”?

“Ordinary Business Care and Prudence” means that a Taxpayer is making provisions for business obligations to be met when reasonably foreseeable events occur. Reasonable Cause could be established if a Taxpayer is able to provide facts and circumstances that show that the Taxpayer exercised ordinary business care and prudence but was “unable” to comply with the law.

IRS determines if a Taxpayer exercised “Ordinary Business Care and Prudence” by reviewing the following:

  1. Taxpayer’s Reason: Taxpayer should address the penalty imposed, and the dates and explanations should correspond with events on which the penalties are based.
  2. Compliance History: IRS will check three years for payment patterns and a Taxpayer’s overall compliance history.
  3. Length of Time: IRS will consider (1) when the act was required by law, (2) the period of time during which a Taxpayer was unable to comply with the law due to circumstances beyond the Taxpayer’s control, and (3) when a Taxpayer complied with the law.
  4. Circumstances Beyond the Taxpayer’s Control:  IRS will consider whether or not a Taxpayer could have anticipated the event that caused the noncompliance.

Common Taxpayer Circumstances presented to IRS  

  • A Death, Serious Illness, or Unavoidable Absence.  This may establish Reasonable Cause for filing, paying or depositing late.
  • A Fire, Casualty, Natural Disaster, or Other Disturbance-Reasonable Cause.  IRS will try to determine if a Taxpayer could not comply timely because a Taxpayer was an “affected person” eligible for disaster relief.
  • Inability to Obtain Records.   Explanations relating to the inability to obtain necessary records may constitute Reasonable Cause in some instances but may not in others.
  • Making a Mistake.   A Taxpayer may try to establish Reasonable Cause by claiming that a mistake was made.   This does not normally provide a basis for Reasonable Cause as it may demonstrate that a Taxpayer is not meeting the ordinary business care and prudence standard.
  • Taxpayer obtained Erroneous Advice or Relied on Others.  IRS will try to determine if a Taxpayer is claiming non-compliance due to specific advice he or she received from someone (orally or in writing) or is claiming reliance on someone else to comply.  
  • Ignorance of the Law.  In some instances, Taxpayers may not be aware of specific obligations to file and/or pay taxes.
  • Forgetfulness?  A Taxpayer may try to establish Reasonable Cause by claiming that forgetfulness or an oversight by the Taxpayer, or another party, caused the noncompliance. IRS views this as not in keeping with the ordinary business care and prudence standard and does not provide a basis for Reasonable Cause.

Don’t be a victim of your own making

Taxpayers that are not able to comply with their tax obligations ought to consult with a specialized tax representative.