Reasonable cause for abating penalties.

• Author: Taylor, David E.
• Position: Examples of effective methods for abating IRS penalties

IRS penalty notices usually create frustration and anxiety for both taxpayers and their tax advisers. From the practitioner's perspective, penalty notices may be embarrassing and often become a time-consuming project to resolve.

The Internal Revenue Code allows the Service to abate late filing and payment penalties if reasonable cause exists. The regulations and most courts require a taxpayer to show that the failure was not due to willful neglect and that ordinary business care and prudence were exercised even though the required actions was unable to be performed timely; see, for instance, Regs. Sec. 301.6651-1(c)(1).

The key to successful abatement of penalties is preparing a reasonable cause statement that satisfies the IRS's criteria (described in Section 4562.2 of the Internal Revenue Audit Manual (IRM). Reasonable cause as described in the IRM generally deals with events and casualties beyond the taxpayer's control. In addition, the IRM also recognize that reliance on a competent adviser may be reasonable cause:

Taxpayer contacts a tax advisor who is competent on the specific tax matter, furnishes necessary and relevant information, and is then incorrectly advised that the filing of a return is not required. Further the taxpayer exercises ordinary business care and prudence based on the taxpayer's own information and knowledge in determining whether to secure further advice; then the taxpayer may have reasonable cause. Note: Reliance on a tax advisor to prepare a return is not reasonable cause for failure to file, the duty to file is upon the taxpayer.

In Boyle, 469 US 241 (1985), the Supreme Court unanimously (but with a four-justice concurring opinion) attempted to draw a "bright line" for reasonable cause. The taxpayer, a businessman who was appointed executor of his mother's estate engaged an attorney to prepare the estate tax return. The taxpayer did not know the return's due date, but relied on the attorney's assurances that the return would be prepared "in plenty of time." Despite the taxpayer's numerous inquiries, the return was filed three months late. The Supreme Court recognized that reliance on a tax professional is reasonable cause when an issue involves a matter of tax law. However, in Boyle, the taxpayer did not rely on his attorney's legal advice. Rather, he delegated his filing responsibility:

When an attorney or accountant advises a taxpayer on a matter of tax law, it is reasonable for the taxpayer to rely on that...