What constitutes reasonable cause? That depends, of course on the
situation. We can tell you that the way you request the abatement and state your
case can make all the difference in whether or not it is granted. That is why it is
typically in your best interest to call us for assistance. We have written many
requests for penalty abatement for our clients and we generally know the difference
between reasonable cause and a "flimsy excuse."
Some of the "reasonable cause" arguments the IRS will accept are as
Don't laugh! Even though ignorance of the law is
not generally an excuse accepted by your local peace officer, it just may be accepted by
the IRS. Why is that? Because many of the intricacies of the tax code can
really be quite confusing for the average taxpayer and the average IRS employee is aware
If the penalty resulted from a complex tax issue and you can demonstrate
that you made an honest effort to abide by what you thought was the rule, you may try
throwing yourself on the mercy of the IRS. Of course, if the issue is fairly
straightforward, you may possibly do yourself more damage than good by making a shallow
ignorance plea which would supercede a much more reasonable excuse for the error, so use
this argument wisely.
A Simple Mistake
Say what? It's that easy? Could
be. If you can show that you or a subordinate simply missed a tax deadline, but took
corrective steps as soon as you discovered the error, your excuse may pass muster.
Of course, this excuse will not work for individual taxpayers missing the April 15th
deadline since that is such a well publicized event, but many business deadlines are not
quite so well noted and honest mistakes do happen.
The IRS will consider many
factors when you are taking the "mistake" route. How quickly did you
discover the error, how quickly you acted after discovering the error, your past history
of making deadlines, etc. They are simply looking to see that you exercised general
business prudence in your actions both before and after the error was discovered.
So you would like to blame us, eh?
Demonstrating to the IRS that you acted on the result of incorrect professional advice can
be considered reasonable cause if you can adequately demonstrate the following in your
- You provided complete and accurate information to the tax advisor
- You did in fact rely on the advice of the tax advisor
- You can provide supporting documentation of the advice provided
- You had no reason to know or suspect that the advice was incorrect
Death or Serious Illness
Almost always acceptable as a reasonable
cause in the case of an individual return, it is much more difficult to use death or
illness for business payments or returns. Even if you can demonstrate that only one
person in the business was responsible for the filing or payment, the IRS may counter that
you, therefore did not exercise ordinary business care.
Casualty or Natural Disaster
Again, if you can prove that the error was
caused by circumstances beyond your control (fire, flooding, theft, etc.), the IRS will
generally allow it as reasonable cause. However, you may be asked to provide proof
of the casualty - police or insurance records, etc.
Lack of Money To Pay
Wouldn't it be great if this one worked?
Actually, on occasion, it does. This is not an easy excuse to use, but if you can
demonstrate that you are unable to pay as a result of an unexpected loss (medical bills,
loss of a job, etc.), the IRS may grant you reasonable cause. You should again be
prepared to back up your claims and produce bank statements, medical bills, etc. to back
up your claims.
You may also have to demonstrate that you had no other means of
securing the funds to make the payment when due. Simply trying to show that you had
no money in the bank at the time the payment was due would typically not be considered
reasonable cause. The IRS would simply counter that you knew the taxes had to be
paid and should, therefore have saved the money.
Unable To Obtain Necessary Records
The IRS will grant you reasonable
cause if you can prove that you were unable to obtain the necessary records needed to file
a return. Bear in mind that you will be required to demonstrate that you could not
have accurately estimated the information or obtained the information from another source.
You must take great caution here to show that you exercised common business
prudence in maintaining or obtaining the records necessary. Copies of correspondence
requesting the records may be needed to state your case.
The important factor to keep in mind when dealing with IRS penalties is simply
this; the decision on whether to grant an abatement or enforce a penalty is left to
the sole discretion of the IRS employees examining your case or reading your mournful
letter. It is in your best interest to realize that you are not dealing with a ship
of fools and your most likely success will come from an honest and forthright explanation
of your case.