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Reasonable Cause

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By Roy Lewis

In "Late Payment and Late Filing Penalties," we discuss, appropriately enough, penalties for late payment of tax bills and for late filing of tax returns. These penalties are simply two of the most popular of the many civil penalties that the IRS can impose if you step out of line. There are more than 40 civil penalties, ranging from the "failure to pay stamp tax" penalty to the ever-popular "filing a frivolous or incomplete return" penalty.

So... once Uncle Sammy imposes a penalty on you, are you simply stuck? Is your only option to belly up to the bar and pay? Not necessarily. Virtually all civil penalties can be excused by the IRS if you can show them "reasonable cause" for the actions (or inactions) that precipitated the penalty in the first place.

What constitutes "reasonable cause"? Please don't try "the dog ate my tax return" gambit. It won't work. "I forgot" is also a popular, but ineffective, excuse. And, the old stand-by: "My tax person was just too busy," will just cause Uncle Sammy to guffaw into his beard.

The court records are littered with what might or might not be defined as "reasonable cause." Boiling down the thousands of cases, you can distill many of the most common definitions of "reasonable cause." They include:

Erroneous information was given to you by an IRS employee or publication.

If this occurred in your case, you would be in the strongest position if you kept detailed records of the phone call, meeting, email, or publication in which the IRS erred. If you simply say, "That's what they told me to do over the telephone," with no supporting notes or documents, you'll certainly have a problem.

Erroneous information was given to you by a tax practitioner.

General reliance on a tax expert for tax help doesn't relieve you of responsibility if Uncle Sammy deems the information given to you is contrary to a commonly known fact.

For example, if you claim that your tax pro told you, without reasonable explanation, that you didn't have to file a return on April 15, or you didn't have to pay your balance due on that same date, you're going to have a problem. Everybody knows that a tax return or extension is due on April 15, and that the payment is also due on that date. That's common knowledge.

But, if a qualified tax pro incorrectly advised you that you are not obligated to file because your income was too low or because you will have no tax liability based on an analysis of the tax law, the reasonable cause excuse might be available to you.

Death or serious illness of the taxpayer or a member of his immediate family.

Let's say that Aunt Jane suddenly passed away in April. In reviewing her documents and paperwork in June, the family noticed that Aunt Jane didn't file her tax return before she died, and the family files it on her behalf. The penalties could certainly be opposed using the "reasonable cause" doctrine.

The courts have defined "illness" in many different ways, including both mental and physical illness, and even temporary incapacity. So, if you find yourself in a penalty position but can produce medical documents to prove your illness, you might have a "reasonable cause" argument. The use of any "medical" reasons, however, can get a little tricky, and might require the assistance of a qualified tax pro.

On the other hand, the following excuses will generally not get you out of any civil penalty situations:
  1. Lack of necessary information to prepare the tax return.

  2. General overwork, stress, or health problems of either you or your tax return preparer.

  3. Ignorance of the law (not based on the advice of a tax expert). But, you should also be aware that, in some cases, where the taxpayer's mistaken belief (that filing was not required, for example) was deemed "reasonable" or due to extraordinarily complex tax concepts, reasonable cause was found.

  4. Financial hardship. You could qualify for payment extensions due to financial hardship. But, you should understand that, by itself, financial hardship doesn't support a reasonable cause excuse.

  5. Constitutional, religious, etc., objections. Philosophical arguments such as "the tax laws are unconstitutional" are consistently given short shrift by the courts and the IRS. Don't even waste your time.

A few hints for you if you find yourself in a penalty situation

If you are filing or paying late, but can establish reasonable cause, don't wait for the penalties to be assessed. A statement establishing reasonable cause for your situation should be attached to the return and might prevent the penalties from the start.

If the IRS has already added civil penalties on top of your tax liability, there are two things that you should do. First, you should attempt to review the IRS computations and calculations of the penalties. The IRS has made mistakes in the past and will make them in the future. You don't want to argue a penalty that was incorrectly computed in the first place. Second, you should attempt to understand if you might be able to portray your circumstances in a manner that could support a reasonable cause excuse. While you certainly don't want to lie to the IRS, there is nothing that says that you can't prepare your appeal letter in the best light possible for your position.

If the penalties are large or the issues complex, you'll most likely want the help of a qualified tax pro. Many times research is required to determine if a special, "quirky" provision is out there that would provide you with a "reasonable cause" excuse. Unless you are willing to march down to your local law library, learn how to access the information, and take a quick course in legal research, you'll need help.

While the IRS doesn't want to talk much about what it considers "reasonable cause," you can get a bit more flavor for the issue if you read IRS Publication 17's chapter "Your Rights as a Taxpayer" and IRS Publication 556 dealing with examination of returns and appeal rights.
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