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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • IRS penalty abatement and “reasonable cause” – what does that mean?

    “Reasonable Cause”…could there be a more vague phrase? It makes sense than that this is the standard used by the IRS to determine whether a penalty should be forgiven or “abated”. It leaves some wiggle room.

    Ridding yourself of an IRS penalty is all about this vague “reasonable cause” standard and the taxpayer has to be able to show “reasonable cause” in order to have the penalty wiped away.

    So what is it? In essence it is any excuse that the IRS will accept.

    The Internal Revenue Manual states: Any sound reason advanced by a taxpayer as the cause for delay in filing a return, making deposits…or paying tax when due will be carefully analyzed…

    Some examples of reasonable cause that the IRS strongly considers:

    • The death or serious illness of the taxpayer or the immediate family.
    • Unavoidable absence of the taxpayer
    • Taxpayer unable to determine amount of the deposit of tax due for reasons beyond the taxpayer’s control
    • Destruction by fire or other casualty of the taxpayer’s place of business or records.
    • Lack of funds when a taxpayer can demonstrate the lack of funds occurred despite the exercise of ordinary business care and prudence

    Other explanations are considered and almost any excuse can be provided. Many taxpayers simply argue that he or she exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time.

    It is always wise to submit the penalty abatement request based on one of the items listed above if possible. There are many other excuses that have been provided to the IRS that have succeeded like:

    • If the tax had been paid on time the taxpayer would have suffered an undue hardship. This means that, had you paid the tax on time, you would not have been able to put food on the table or been taken care of medically. Proof is important here.
    • Reliance on a tax professional that led you down the wrong path. If your’e accountant caused the problem by giving you bad advice or filing the wrong form for instance.
    • Employer submitted the wrong 1099 or w-2 form.
    • The IRS wouldn’t help you figure it out when you asked.