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Reasonable Cause for Penalty Removal

The penalties may generally be reduced or removed if a taxpayer shows reasonable cause.

What Constitutes "Reasonable Cause"?

The IRS Penalty Handbook defines reasonable cause as those reasons deemed administratively acceptable to the Service for justifying the nonassertion or abatement of applicable penalties against taxpayers. “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.” The Handbook also says, “Each case must be judged individually based on the facts and circumstances at hand.”

CFR Section 301.6651 requires a written statement containing a declaration that is made under penalty of perjury and signed by the taxpayer or a representative having power of attorney. A request from a taxpayer's representative is considered a request by the taxpayer if:

  1. The taxpayer's representative is an attorney, certified public accountant, enrolled agent, or any person permitted to represent the taxpayer before the IRS; and
  2. The representative has been given a properly signed power of attorney. The Internal Revenue Manual contains this recommendation of the documentary evidence to support a reasonable cause request: "Taxpayers should be advised to submit documentation supporting the claim.

Supporting documentation might include death certificates, doctor's statements, insurance statements, or other objective evidence.”

Internal Revenue Code Section and Regulations References

  • Neither the accuracy-related penalty nor the fraud penalty is imposed with respect to any portion of an underpayment if it is shown that the taxpayer had reasonable cause for an underpayment and acted in good faith. (Code Sec. 6664(c))
  • This standardized reasonable cause exception was designed to provide greater scope for judicial review of IRS penalty determinations.
  • For example, under the former waiver provision, the Tax Court held that it could overturn an IRS determination of the substantial understatement penalty on reasonable cause and good faith grounds only if it found that the IRS abused its discretion in asserting the penalty.
  • Code Sec. 6664(c) was intended to apply the same standard of review to the accuracy-related penalty as applies to the review of additional taxes assessed by the IRS (House Committee Report, Revenue Reconciliation Act of 1989)., Frivolous challenges to the regulations remain subject to the penalty.
  • The meanings of the terms "reasonable cause" and "good faith" are unchanged from those applicable under the former penalty structure. Whether a taxpayer has reasonable cause and good faith is a facts and circumstances determination made on a case-by-case basis. The most important factor is the extent of the taxpayer's effort to assess proper tax liability. (Reg. §1.6664-4(b))

Guidance for IRS Employees in Evaluating Reasonable Cause Request

Summarized From the Internal Revenue Manual, Section 20, Penalty Handbook

  1. The burden of proof to establish reasonable cause is generally upon the taxpayer.
  2. Each reasonable cause request must be evaluated on its own merit.
  3. The merits should be determined based on the events or parties involved and whether or not the taxpayer exercised ordinary business care and prudence, but due to circumstances or events beyond the taxpayer's control, he/she was unable to meet the tax requirement.
  4. Determine if the taxpayer's reason addresses the penalty imposed., To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based.
  5. In determining whether or not ordinary business care and prudence were used, review available IRS information., Check previous periods for payment patterns and penalty history., The same penalty previously assessed may indicate that the taxpayer is not exercising ordinary business care to meet tax obligations.
  6. Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance.
  7. Consider whether or not the taxpayer could have anticipated the event that caused the noncompliance.

Reasonable Cause

Reasonable cause has been defined as that which would prompt an ordinarily intelligent person to act under similar circumstances as did the taxpayer. The following have been used as grounds for reasonable cause in requesting penalty removal (they may or may not be favorable grounds):

  • Reliance on IRS advice or publications; 
  • Expert tax advice;
  • Delegating filing of tax return to attorney or accountant;
  • Oversight of the taxpayer or an employee;
  • Ignorance or misunderstanding of law by a nonexpert;
  • Missing information;
  • Unavailability of books and records;
  • Essential parties to the situation unavailable;
  • Overwork, stress, or health problems of the taxpayer;
  • Unresolved dispute with IRS or other litigation;
  • Disputes or misunderstandings between spouses;
  • Financial hardship;
  • Problems with U.S. postal service;
  • Normal business practice.

Reasonable cause requests for non-assessment or abatement of penalties:

  • The law allows IRS to remove, reduce, or not assess penalties for late filing and/or late payment if the taxpayer is able to show "reasonable cause"., IRS procedures require that in most cases where the penalty is being asserted, reasonable cause criteria should be discussed.
  • Appeals has jurisdiction to hear penalty cases prior to full payment.

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