Posted by The TaxAdvocate Group, LLC

Reasonable Cause to Avoid Tax Penalties

Reasonable Cause to Avoid Tax Penalties

Reasonable cause is based on objective facts and circumstances. 

What constitutes "reasonable cause" under code section 6651 to avoid penalties for failure to file an income tax return or pay taxes?

Failure to comply with filing your return will result in a mandatory sanction unless the taxpayer finds that the non-compliance was caused by a just cause and not by willful negligence. A reasonable cause can be interpreted as requiring the taxpayer to demonstrate that he/she exercised prudence and ordinary business care but that he/she could not comply or that compliance would cause undue hardship. The onus is on the taxpayer "to prove that the lack of timely filing is due to reasonable cause and not intentional negligence." "The absence of fault" is the key factor; therefore, the taxpayer must demonstrate that the breach was unintentional or resulted from recklessness or indifference.

The IRS Penalty Handbook Manual sets out several acceptable reasons that the service will accept as "reasonable cause." These include, but are not limited to, death or serious illness of the taxpayer or a close relative, the inevitable absence of the taxpayer, destruction of business or documents due to force of law major or civil unrest, the inability to obtain grounds for reasons beyond the control of the taxpayer, incapacity, ignorance of the law by the poorly educated taxpayer, incomprehension of a complex or ambiguous area of tax law, error, problems in delivering correspondence, advice from a tax expert, postal delays and marital problems. These reasonable causes will be discussed later in the article.

While the vast majority of cases involve tax returns, gifts, estates, and employment, these cases' reasoning would logically apply to the late filing of returns and statements. 

The IRS rate is around 39 million in fines each year, and only 11% is abated. Why? Because many do not ask or do not know how to ask for abatement.

For most penalties (late filing, late payment, and return error), the five basic reasons the IRS reduces penalties can be summarized below:

  • Administrative Exemption: The Internal Revenue Service (IRS) does not assess or reduce a penalty to facilitate tax administration. Example: Difficulty paying a fine; abatement for the first time

  • Appeals – Hazards of litigation: IRS Resolution, in an audit based on the likelihood of winning in court. Example: Taxpayer and IRS settles an audit in IRS appeals that eliminate accuracy penalty

  • IRS Error: This is a reliance on advice from the IRS that caused the error. Example: oral or written advice from the IRS on a tax filing position that the taxpayer had reasonable confidence in.

  • Reasonable cause: for the delay in filing and late payment: the taxpayer has circumstances beyond his control that prevented him from complying. A reasonable attempt was made to report the corresponding taxable amount on a tax return. Example: Many reasonable cause arguments, including disaster, honest error, long-term illness, loss of records, and reliance on advice.

  • Statutory exception: Specific exclusion from a sanction defined by law. Example: disaster zone relief, combat zone relief.

Although there are five reasons, reasonable cause and administrative waiver are the arguments often used to abate penalties. The most common administrative exemption is the First Time Abatement, which allows the taxpayer to obtain a "free permit" for late filing and pay fines if they have clear evidence of compliance (usually without fines in the past three years prior to the year in question). Almost 2 million taxpayers are eligible for the first-time abatement, but only about 8% apply.

The second most common reason is "reasonable cause." A reasonable reason is the IRS term for a good excuse as to why you didn't obey. You must have tried to comply, but it was not possible due to unforeseen circumstances or difficulties. In order to report the accuracy penalties commonly seen in CP2000 sub-surveyor notifications or audits, you must have made a reasonable attempt to correctly report the tax (i.e., all income and correctly deduct the expenses and credits).

The format and content of your application are important.

There are two reasons why a reasonable cause might be denied:

IRS Ignores All Facts In Your Letter

Because the IRS Computer-Assisted penalty abatement decision-making tool analyzes all reasonable cause arguments in a silo, they usually ignore all circumstances.

For example, a taxpayer may ask the IRS for failure to file a penalty abatement because he/she was ill for a long time at the time of the refund. The taxpayer could also have hired a tax professional to help him/her and depended on him/her to request a timely extension or declaration. In these circumstances, if the taxpayer suggests that he/she relied on a tax expert to file his/her tax return on time, he/she will be automatically denied reasonable cause abatement for the failure to file a penalty. Why? The IRS never allows "reliance on a tax professional" as the sole reason for not filing a penalty abatement.

This is where the IRS computerized penalty abatement tool fails: the IRS computerized penalty abatement tool (called "Reasonable Cause Assistant") will refuse to reduce the sentence because it is programmed to refuse, provided that reliance on a tax expert is cited. IRS personnel rely almost exclusively on this tool to determine abatement. In our case, the illness of the taxpayer caused uncontrolled circumstances and which would be the main reason for the abatement. However, the IRS saw only one isolated negative factor and denied the abatement.

The letter was incomplete.

Add to the taxpayer's circumstances that he/she was incapacitated due to prolonged illness at the time of filing or that there was emotional distress due to a family crisis, and the taxpayer has little financial knowledge, and it was the first time they were late - you know? All the circumstances, along with a timeline of what happened, will strengthen your argument. A brief statement saying "I received a penalty, but gave it to my tax professional" will not work.

Accuracy Penalty Relief

Lately, there have been several precision penalties (negligence or substantial underestimation) in the IRS CP2000 notification. A common reasonable argument is to claim that you trusted a tax professional who made a mistake. Many arguments end here, and the IRS denies them as incomplete. Added to this are the tax specialist's accreditations and experience, the lack of his/her tax knowledge, the information he/she provided to the CPA, and the way he/she analyzed the return and concluded that it was submitted correctly.

It is important to assert penalties for accuracy during the audit or CP2000 process from a procedural standpoint. If you do not argue during this process, you will forfeit important appeal rights with the IRS. Finally, to remove the sanctions, it will be necessary to request an audit or review of the CP2000, which could take months or even 


Last tip: be prepared to appeal

However, if the IRS denies the abatement, as they usually do, be prepared to file a timely appeal. Since the IRS reviews many abatement requests in a silo, you will need to provide an overview to a live person, and you will often get the abatement.



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