I am often asked about how a person might be able to avoid paying civil tax penalties imposed on them by the IRS. In the case of the most common penalties — those for lateness in filing your tax return or paying your tax liability — the penalty may be excused by the IRS if you can establish “reasonable cause” for your actions. Reasonable cause can also excuse a variety of other civil tax penalties.

What types of events will support a reasonable cause claim? The following are the most common that have been successful:

1.      Erroneous information was given the taxpayer 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, or publication in which the IRS erred.

2.      Erroneous information was given the taxpayer by a tax practitioner. General reliance on a tax expert for tax help doesn't relieve a taxpayer who will be considered to be aware of commonly-known facts such as the filing and payment deadlines. However, where a tax expert, for example, incorrectly advised the taxpayer that he is not obligated to file or that he will have no tax liability upon an analysis of the tax law, the reasonable cause excuse may be available.

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

You may qualify for payment extensions due to financial hardship. However, by itself, financial hardship has rarely been found to support a reasonable cause excuse. The IRS and some courts support a “bright line” rule under which financial difficulties can never be reasonable cause for purposes of the penalty for failure to pay taxes, but other courts have not been willing to go quite that far.

The following, on the other hand, won't establish reasonable cause:

1.      Lack of necessary information to prepare the tax return.

2.      General overwork, stress, or health problems of the taxpayer or tax return preparer.

3.      Ignorance of the law (not based on the advice of a tax expert). In some cases, however, where the taxpayer's mistaken belief, e.g., that he was not required to file, was “reasonable” or due to extraordinarily complex tax concepts, reasonable cause was found.

4.      Constitutional, religious, etc., objections. Philosophical arguments, such as the tax laws are unconstitutional, are consistently given short shrift by the courts and IRS.

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 may prevent the penalties from the start. If you would like me to help you draft the statement to present your situation in the most favorable light, please call.

If the IRS has already added civil penalties on top of your tax liability, there are two reasons you should call. First, I can review the IRS's calculation of the penalties. Second, we should discuss whether your circumstances are explainable in a way that could support a reasonable cause excuse.

I hope the above is helpful. If you need additional information, please call.

Ralph Sayers, CPA

(877) 316-4331

ralphs@tampabay.rr.com