Reasonable cause relief is the IRS's non-assertion or removal of certain civil penalties for failures related to filing information returns or IRS tax returns, making a deposit, or paying a tax, due to reasonable cause and not due to willful neglect. Reasonable cause is based on all the facts and circumstances in each situation. The IRS will consider any reason that establishes the taxpayer exercised all ordinary business care and prudence to meet their tax obligations but was nevertheless unable to comply with a prescribed duty within the prescribed time.
Legal Basis and Criteria for Reasonable Cause Relief
- General Definition:
- Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.
- Statutory and Regulatory Framework:
- IRC 6664(c)(1): No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.
- Treas. Reg. 301.6651-1(c): Provides examples of circumstances that may be helpful in determining if a taxpayer has established reasonable cause.
- Factors Considered:
- What happened and when did it happen?
- During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?
- How did the facts and circumstances result in the taxpayer not complying?
- How did the taxpayer handle the remainder of their affairs during this time?
- Once the facts and circumstances changed, what attempt did the taxpayer make to comply?
- Specific Situations:
- Death, Serious Illness, or Unavoidable Absence: If there was a death, serious illness, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family.
- Fire, Casualty, Natural Disaster, or Other Disturbance: If the taxpayer could not comply timely because of such events.
- Unable to Obtain Records: If the taxpayer was unable to obtain necessary records to comply with a tax obligation.
- Mistake Was Made: If the taxpayer made a mistake but otherwise exercised ordinary business care and prudence.
- Erroneous Advice or Reliance: If the taxpayer relied on erroneous advice from the IRS or a tax advisor.
- Ignorance of the Law: If the taxpayer was unaware of specific obligations to file and/or pay taxes and made reasonable efforts to determine their tax obligations.
- Forgetfulness: Generally, forgetfulness or oversight by the taxpayer or another party does not provide a basis for reasonable cause.
- Documentation and Evidence:
- Taxpayers must provide a detailed explanation and supporting documentation to establish reasonable cause. This may include:
- Dates and explanations that correspond with events on which the penalties are based.
- Proof of efforts made to comply with tax obligations.
- Evidence of circumstances beyond the taxpayer’s control.
- IRS Procedures:
- IRM 20.1.1.3.2: Reasonable cause relief is not available for all penalties; however, other exceptions may apply. For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.
- IRM 20.1.1.3.3.4.2: Discusses the consideration of facts that should be taken into account when dealing with penalty relief due to erroneous oral advice given by an IRS employee.
Conclusion
Reasonable cause relief is a mechanism by which the IRS can abate penalties when a taxpayer demonstrates that they exercised ordinary business care and prudence but were unable to comply with tax obligations due to circumstances beyond their control. The determination of reasonable cause is based on a comprehensive review of all facts and circumstances, and taxpayers must provide detailed explanations and supporting documentation to substantiate their claims.
Sources:
IRM Part 20. Penalty and Interest. Chapter 1. Penalty Handbook. Section 1. Introduction and Penalty Relief
§ 301.6404-2. Abatement of interest.
§ 6664. Definitions and special rules
IRM Part 20. Penalty and Interest. Chapter 1. Penalty Handbook. Section 9. International Penalties
IRM Part 21. Customer Account Services. Chapter 7. Business Tax Returns and Non-Master File Accounts. Section 7. Exempt Organizations and Tax Exempt Bonds
IRM Part 4. Examining Process. Chapter 71. Employee Plans Examination of Returns. Section 1. Overview of Form 5500 Examination Procedures
