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IRS Penalty Abatements and Reasonable Cause

IRS Penalty Abatements

As noted previously, the purpose of (assessing) a penalty is to encourage voluntary compliance. “Voluntary compliance exists when taxpayers conform to the law without compulsion or threat” (IRS.gov, “20.1.1.2.1 Encouraging Voluntary Compliance,” 8/14/2013). The taxpayer supports the tenets of the Internal Revenue Code in achieving voluntary compliance when he or she makes a good faith effort to meet all tax obligations (“Encouraging Voluntary Compliance”).

Within this context, the taxpayer is deemed compliant when he or she responds to written materials outlining the tax rules and completes all forms relevant to their tax liability. To encourage taxpayer self-compliance, the IRS fairly, consistently, and accurately administers a system of penalties (“Encouraging Voluntary Compliance”). The IRS also educates taxpayers to encourage future compliance.

Reasonable Cause

When a taxpayer provides an explanation to support his or her request for relief, the IRS waives and/or abates the applicable penalty. “If the explanation applies to one (or more) penalty(s) but not all penalties, only the penalty(s) to which the explanation applies should be waived or abated” (“Part 20”). When relief is granted, particularly after the assessment of the penalty, the appropriate portion(s) of the penalty is abated. However, adjustments due to reasonable cause fall under specific guidelines.

Section 20.1.1.3.2 of the Internal Revenue Manual defines reasonable cause within the context of the taxpayer failing to comply with their tax obligations and the granting of relief because the taxpayer “exercised ordinary business care and prudence in determining their tax obligations” (IRS.gov, “20.1.1.3.2 Reasonable Cause,” 8/14/2013). Reasonable cause relief is usually granted under these circumstances (“Reasonable Cause”). Reasonable cause is defined within penalty sections of the Internal Revenue Code as the evidence required by the taxpayer that he or she “acted in good faith or that the taxpayer[’s] failure to comply with the law was not due to willful neglect” (“Reasonable Cause”). In essence, a taxpayer may have reasonable cause when evidence of their conduct justifies non-assertion or abatement of penalty (“Reasonable Cause”). Cases are judged individually; judgments are based upon presented evidence, facts, and circumstances.

When evaluating the merits of a case, specific criterion is used to determine the taxpayer’s culpability. For example, a specific question that the IRS might use centers on determining what attempt(s) the taxpayer made to comply once all facts and circumstances changed. This question among five others helps the IRS to evaluate the taxpayer’s decision-making abilities to determine if “circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law” (“Reasonable Cause”).

The Internal Revenue Manual outlines how reasonable cause and other relief provisions are applied within the context of effective tax administration. The provisions must be applied in a “consistent manner and should conform with the considerations specified in the IRC, Treasury Regulations (Treas. Regs.), Policy Statements, and IRM Part 20.1, Penalty Handbook” (“Reasonable Cause”).

It is important to note that reasonable cause relief is not always available for all penalties. For example, a reasonable cause provision may only apply to a specific section of the Internal Revenue Code. In addition, acceptable explanations are not just limited to those outlined within section 20.1 of the Internal Revenue Manual. In essence, penalty relief is typically considered when findings reveal that the taxpayer exercised ordinary business care and prudence even though unable to comply within a prescribed time frame. However, once the facts and circumstances reveal that the taxpayer willfully neglected to comply with his or her tax obligation(s), reasonable cause ceases to exist (“Reasonable Cause”).

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