Reasons for IRS Penalty Relief

Reasonable Cause

A taxpayer can demonstrate that reasonable cause exists to abate or remove tax penalties when they can show they exercised ordinary business care and prudence in figuring-out their taxing obligations, but nevertheless circumstances resulted in them being unable to comply with those obligations.  The IRS determines if reasonable cause exists by taking all the facts and circumstances of each taxpayer when examined.

Ordinary Business Care and Prudence

Ordinary business care and prudence means to make provisions for business obligations based upon foreseeable events. If a taxpayer can show that they took the same degree of care that an ordinary and reasonable person would take, but nevertheless was unable to comply with the law, then the taxpayer will typically have established that they exercised ordinary business care and prudence.

• Reason: IRS employees are required to take into consideration the reason that a taxpayer failed to comply with the law. The reason should directly relate to the tax penalty and any dates should correspond with the explanation that led to the penalty.

• Compliance History: If a taxpayer has a history of the same tax penalty being assessed against them, then the IRS will take this to mean that the taxpayer does not exercise ordinary business care and prudence with their tax matters.

• Length of Time:   The IRS will take into account the length of time between the event provided as the reason for non-compliance and any subsequent compliance.

• Circumstances Beyond the Taxpayer’s Control: If a taxpayer was unable to anticipate an event and this event caused noncompliance, then the taxpayer exercised ordinary business care and prudence.

Ignorance of tax Law

Ignorance of the law is generally not an excuse to avoid meeting one’s tax obligations. However, ignorance of the law in connection with additional facts and circumstances may excuse a taxpayer’s failure to meet their obligation. Examples of other factors that combined with ignorance of the law may lead to non-assertion of an IRS penalty are: the taxpayer's level of education, if the taxpayer was subject to this tax before, if the taxpayer was previously penalized by the IRS, if there were recent changes in the law or forms that the taxpayer could not reasonably have  known, and if the complexity of the issue involved was substantial.

Death, Serious Illness, or Unavoidable Absence

Unable to obtain records

1. Why the taxpayer needed the records to comply
2. Why the records were unavailable and if and to what extent that taxpayer took steps to acquire the missing records
3. When, why, and how the taxpayer became aware that they were not in possession of the required records (4) If other avenues or means were explored to obtain the necessary information
4. If the taxpayer contacted the IRS for directions on how to proceed without the records
5. If the taxpayer promptly came into compliance once the missing information was located
6. Any supporting documentation to demonstrate the attempt to find the missing information

Administrative Waiver of IRS Penalties

An administrative waiver is where the IRS issued a policy statement, news release, or other formal communication providing that the IRS's policy is to accommodate tax penalty relief under specific conditions. An administrative waiver is typically issued when the IRS delays printing forms or providing guidance.

Undue Hardship

The treasury regulations provide that taxpayers may receive an abatement of an IRS tax penalty if they can show undue hardship. However, undue hardship requires more than a mere inconvenience to the taxpayer. It must be shown that the taxpayer would incur a substantial economic loss if forced to pay.

Erroneous Written Advice from the IRS

If an IRS employee acting in their official capacity provides written advice to a taxpayer, and the taxpayer reasonably relies on this advice, and this leads to an IRS penalty, then the tax penalty should be abated. As a caveat, the IRS will only consider the taxpayer to have reasonably relied on erroneous written advice until such time as the taxpayer is put on notice that the advice was incorrect.  For example, if the IRS issues a publication or a different IRS employee informed the taxpayer that their previous written advice was incorrect.

Erroneous Oral Advice from the IRS

Although the code and regulations only provide for tax penalty abatement based on erroneous written advice, the IRS has administratively extended this relief to oral advice as well. Factors the IRS considers are:

Advice from Tax Advisors

IRS Penalties may be abated if the taxpayer can show that they reasonably relied on the advice from a tax advisor and that the issue was considered technical and complicated. The taxpayer's failure to file, pay, or deposit taxes cannot be excused based on reliance of advice from a tax advisor.

Fire, Casualty, Natural Disaster, or Other Disturbances

It is likely that the IRS will provide tax penalty relief if there was a delay due to fire, casualty, natural disaster, or other disturbances. It is important that the taxpayer took steps to attempt to comply as soon as practicable thereafter.

Internal Revenue Service Errors

The IRS will remove a tax penalty where it can be shown that the taxpayer was in compliance with the law and it was only an IRS error that prevented the IRS employee from recognizing the taxpayer's compliance.