Reasonable cause should be considered to abate 10% penalty for underpaying required deposits by fiscal-year S corporations or partnerships.

• Author: Josephs, Stuart R.

At least two service centers have automatically assessed 10% penalties under Sec. 7519(f)(4)(a) for failure to pay deposits required for fiscal-year S corporations and partnerships. Most (if not all) of these penalties are attributable to using a 32% rate, instead of 40.6%, on the 1993 Form 8752, Required Payment or Refund Under Section 7519. This computational error was due to a misconception as to when the tax rate increases imposed by the Revenue Reconciliation Act of 1993 were effective for Sec. 7519 purposes.

The service centers will not consider whether any reasonable cause exists to abate this penalty. They maintain that they do not have such authority, since Sec. 7519 and the temporary regulations thereunder do not explicitly provide such authority - even though Sec. 7519 and those regulations also do not explicitly preclude consideration of reasonable cause.

An appropriate individual in the IRS National Office unofficially and informally agreed with the service centers. A request then was made to have personnel in the Office of Tax Legislative Counsel (TLC), responsible for S corporations, consider this matter and, if they concurred, direct the Service to issue a pronouncement stating that the final Sec. 7519 regulations will allow the 10% penalty to be abated for reasonable cause. However, such consideration was not possible because the TLC (and the Treasury) would then become involved in numerous other disputes between the IRS and taxpayers, which would be precluded by budgetary constraints on TLC's resources.

Subsequently, IRS Notice 746, Information About Your Notice, Penalty and Interest, was revised in Oct. 1994 and contained new language under Sec. 53 stating that [t]he procedures for Reasonable Cause don't apply to this 10 percent penalty."

In addition, on Nov. 29, 1994, the Treasury released a letter under the Freedom of Information Act (for the week ended November 25) to a White Plains, N.Y., practitioner, summarized as follows:

... when dealing with partnerships and S corporations that elect not to have a calendar tax year, penalties cannot be abated for underpayment of taxes when the underpayment is due to an error in calculations - even when the error is made by the taxpayer's tax preparer (Letter No. 20).

Therefore, resolution of this problem has reached an impasse: The IRS lacks regulatory authority to consider reasonable cause and the Treasury (and the TLC) cannot provide such authority because it will not intervene...