Penalty Abatement: 9 Factors That Can Qualify As Reasonable Cause

Wondering what the IRS may consider as reasonable cause? We have listed 9 factors below.

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In this article:

1. Death, Serious Illness, or Any Unavoidable Absence
2. Natural Disasters Such as Fire and Other Casualties
3. Being Unable to Obtain Records as Reasonable Cause
4. Erroneous Advice Received by the Taxpayer
5. A Mistake Was Made
6. Being Ignorant of the Law
7. Unavoidable Absence
8. Being Held Hostage
9. Civil Disturbances

What Can Qualify as Reasonable Cause?

What Does Reasonable Cause Mean?

Reasonable cause refers to any justifiable cause the IRS considers in granting tax penalty abatement to a taxpayer.

As mandated by the IRS, tax penalty abatement can be granted to a taxpayer who is proven to have exercised ordinary care and prudence, despite not meeting tax obligations.

This tax penalty abatement will be granted on the basis of a reasonable cause, narrated by a taxpayer in a reasonable cause letter. The taxpayer should also fill out the IRS Form 843 along with the letter.

Of course, a taxpayer’s penalty abatement may be approved if he consistently files his tax return in good faith. These circumstances include:

• Exhausting all available options the taxpayer could think of to pay both the tax and the penalty
• Can prove that external factors also play a major role in not meeting the scheduled payments
• Making prompt tax payments and timely filing his tax returns in good faith
• Being careful and prudent regarding tax payments, filing deadlines, and other IRS transactions

On the other hand, if there is reasonable suspicion that the taxpayer was negligent, a negligence penalty will apply after the IRS investigates.

What Is Negligence Penalty? Failure to comply or a complete disregard of the IRS rules and regulations will be fined 20% of the amount you underpaid.

Listed below are some common examples of reasonable cause, as listed on the IRS website:

1. Death, Serious Illness, or Any Unavoidable Absence

Death, serious illness, or any unavoidable absence of the taxpayer or his or her immediate family can be considered reasonable cause. The same consideration also applies to corporations, estates, or trusts.

The IRS mandates different rules for individual taxpayers and corporate taxpayers. And, to evaluate, the IRS may probe and verify the following:

• The relationship of the taxpayer to the parties involved in death or serious illness
• The exact date and cause of death
• Severity and duration of the serious illness
• Validity of the dates along with the reasons for the absence that caused tax noncompliance
• Validity as to how the death or serious illness prevented tax compliance
• In the case of businesses, the effects of the tax noncompliance to other necessary business obligations
• Fulfillment of other tax duties given the occurrence of the illness or death

The taxpayer will need to provide additional documents as evidence of this reason. These documents include:

• Medical certificate
• Death certificate
• Proof of insurance payout
• Proof of long absence like a military appointment or a long-term international assignment

2. Natural Disasters Such as Fire and Other Casualties

First, the IRS will evaluate the taxpayer’s eligibility to be considered an affected person by calamities. And then, the rules for such consideration are covered by IRM 25.16.1.2, Identification of Covered Disaster Area and Affected Taxpayers.

Also see IRM 20.1.1.3.3.6, Official Disaster Area.

Any announcement of the government for a state of emergency or calamity in a particular area is enough proof for probable cause.

The IRS may also verify reasonable cause through evaluation of the following factors:

• Timing of the natural calamity
• Effect of the natural calamity on the taxpayer’s business
• Steps taken by the taxpayer to attempt to comply with the IRS
• Attempt of the taxpayer to comply when the chance to do so became available

3. Being Unable to Obtain Records as Reasonable Cause

Being unable to gather necessary records or documentation may also merit reasonable cause. But, the taxpayer needs to provide sufficient explanations to prove ordinary care and prudence.

At the start of the evaluation period, the IRS will first refer to the IRM 20.1.1.3.2.2.3 Unable to Obtain Records, as the basis of its decision-making.

And then, to further verify reasonable cause, the IRS may also review the following:

• The need for such missing records for the taxpayer’s compliance
• The reason why the records are missing
• The steps taken by the taxpayer to obtain such records, along with supporting documentation
• Any consultation the taxpayer made with the IRS about the missing documents
• Any attempt the taxpayer made to successfully comply with his tax obligations when the missing documents are already obtained

4. Erroneous Advice Received by the Taxpayer

A taxpayer can file for reasonable cause because of a wrong piece of tax advice he or she received.

First, the IRS may question whether the taxpayer received such erroneous advice in writing or verbally. Also, it will ask if the taxpayer relied on somebody else to fulfill his or her tax obligations.

And then, the IRS will create its initial evaluation as based on IRM 20.1.1.3.3.4, Advice, IRM 20.1.1.3.3.4.1, Written Advice From the IRS, or IRM 20.1.1.3.3.4.2, Oral Advice From the IRS, refer to IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence.

In addition, the IRS may ask the following:

• Was the taxpayer’s inability to fulfill tax obligations because of lack of access to his or her own records?
• Was the taxpayer’s inability to fulfill tax obligations because of a tax law reform or change?
• And, could the taxpayer reasonably know such tax law change?

RELATED: IRS Penalty Calculator: Breaking Down Your IRS Late Fees

5. A Mistake Was Made

Generally, committing a mistake is not in line with showing ordinary care and prudence. But, filing for reasonable cause because of a mistake that resulted in late filing or underpayment of taxes due can still be valid as long as the taxpayer presents enough evidence to support ordinary care and prudence.

The IRS may ask the taxpayer for the following:

• How and when the taxpayer started to become aware of such mistake
• The efforts made by the taxpayer to correct the mistake after its discovery
• If the taxpayer delegated a duty, the relationship between the said taxpayer and the other party who made the mistake
• Any supporting documentation

6. Being Ignorant of the Law

Additionally, the IRS also mandates that part of showing ordinary care and prudence is being aware of the taxation law. But, in some cases, a taxpayer may not be fully aware of some of the specific obligations.

Ignorance of the law may be reasonable cause. This may be in conjunction with other supporting facts. The following factors may also be considered:

• The taxpayer’s background and education
• The taxpayer’s previous tax compliance history
• If the taxpayer already had a penalty before
• If there are tax reforms or changes that the taxpayer could not reasonably be aware of
• The complexity of the tax compliance issue

Other Reasons

Also, there are other reasons beyond what the IRS specifically prescribed that may merit reasonable cause. Examples are the following:

7. Unavoidable Absence

Unavoidable absences, such as being in a rehabilitation center or being in jail, can be acceptable. As long as the taxpayer can prove that the cause of the unavoidable absence is beyond his or her control, then it could be considered valid.

8. Being Held Hostage

Although this is an extreme example, being held hostage may be a valid reason for reasonable cause. The IRS may consider being held hostage inside or outside the country as an acceptable reason for not meeting tax obligations.

Additional evidence may also be needed, such as news reports. Medical and legal documents may be proof, too.

9. Civil Disturbances

Civil disturbances, such as a mail strike or a local riot, may be valid reasons. These may prevent an individual from fulfilling his or her tax obligations on time.

Filing for reasonable cause may take time and effort. But, as long as you have provided enough justification, then you can avail tax penalty abatement.

Always remember to attach all necessary documentation. And, always be prepared for all questions the IRS may ask.

Other Options

If the tax court finds the documents presented insufficient, you don’t need to panic. You may explore other options to help you with your tax penalties.

One option is to request an administrative waiver or a first-time abatement which is applicable for people who filed their taxes for the first time and made an honest mistake.

You can also request for abatement if the IRS agent handling your case made a written error in the instructions that you trusted and followed.

The penalty abatement process may be an option worth exploring.

 

Filing for tax penalty abatement may be tough. There are different factors that the IRS reviews. But, with determination and proper documentation, your application may be granted.

Don’t forget that when in doubt, you can always reach out to the IRS.

Have you ever applied for a penalty abatement from the IRS? What was the experience like? Share with us your challenges and successes in the comments section below.

If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.

Up Next:

• 3 Legal Programs That Will Help You Get Out Of Tax Trouble
• 6 Reasons Self-Employed And Independent Contractors Must File Back Tax Returns
• Penalties For Late Filing Of Business Taxes

Editor’s Note: This post was originally published on January 14, 2019, and has been updated for quality and relevancy.