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Tax Penalty Abatements: Reasonable Cause Factors - Part One

Tax penalty abatement

My clients often get frustrated and take it personally when they receive a tax penalty from the IRS on top of their balance due.

Tax penalties can substantially increase a balance that is owed to the IRS (coupled with the interest on top of those penalties) and turn a relatively small balance into a much larger one. Furthermore, the IRS takes a hard and fast approach when assessing tax penalties and will often assess the penalties without regard to the underlying circumstances.

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Overview of reasonable cause

Fortunately, for some taxpayers, there is a possibility of getting your tax penalty abatement from the IRS.

Tax penalty abatements are somewhat difficult to get accepted, as the IRS does not simply like to discharge them without some justifiable cause. However, there are a number of “reasonable cause” factors that have been codified by the Internal Revenue Manual that taxpayer’s can use as a basis for challenging their tax penalty. 

As defined by the IRS, a tax penalty abatement is generally granted when the taxpayer exercises ordinary care and prudence, but nevertheless fails to comply with their obligations.[1] For the sake of my readers, I have listed the reasonable cause exceptions to tax penalties below.

Keep in mind that this is not an exhaustive list of the circumstances that a taxpayer can use to get a tax penalty abatement. However, as they are listed in the Internal Revenue Manual, these are the circumstances that I have found in my experience that the IRS is most likely to accept.

Any reason or rational outside of these factors will be much more difficult for the IRS to justify reasonable cause.

Tax penalty abatement factor #1 – Ordinary business care and prudence (IRM 20.1.1.3.2.2)

Ordinary business care and prudence can be demonstrated by showing that the taxpayer made every effort to comply with their tax obligations, but nevertheless for circumstances beyond their control were unable to do so.

The IRS typically looks at four factors when deciding to abate a tax penalty because of reasonable cause.

  • First, the taxpayer should have a compelling reason for seeking the penalty abatement. All appropriate explanations should sync with the dates and circumstances on which the penalties were based.
  • Second, the IRS looks at the compliance history of the taxpayer. Not to say that taxpayers with past non-compliance issues will be denied tax penalty relief, but sometimes bad behavior can weigh negatively on the taxpayer’s circumstances.
  • Third, the length of time that it took for the taxpayer to become compliant must be reasonable under the circumstances.
  • Finally, the circumstances cited as the underlying reason for tax penalty abatement must be truly beyond the taxpayer’s control. 

The IRS will closely look into all of these factors and may request substantiating documentation from the taxpayer in order to validate the sequence of events claimed by the taxpayer.

Tax penalty abatement factor #2 – Death, serious illness, or unavoidable absence (IRM 20.1.1.3.2.2.1)

Any death, serious illness, or otherwise serious medical condition is probably one of the best methods to justify a tax penalty abatement from the IRS. This applies both to individual taxpayers (or their family members) and corporate taxpayers when the person solely responsible for a company’s tax compliance obligations is absent.

In situations where a corporation is involved, the IRS will also look at steps that the company took, in light of this condition, to exercise ordinary business care and prudence. Although nobody enjoys sharing personal details with the government, it is important to document the condition that caused the lack of compliance as much as possible.

This includes dates, details related to:

  • Severity of the condition
  • Relationship of the taxpayer to the individual afflicted with the condition (if not the taxpayer)
  • Any other details that might be relevant to the IRS when making your case
  • Keep in mind that a human being will eventually be reviewing the facts and circumstances surrounding your tax penalty abatement.

There is nothing wrong with asking for sympathy from the IRS in your tax penalty abatement request.

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