When to rely on a tax adviser's advice as 'reasonable cause'.

• Author: Chambers, Valrie

Taxpayers and their representatives often argue that a failure to timely file a tax or information return or to timely pay any tax owed was due to reasonable reliance on the advice of a professional tax adviser. The IRS, U.S. Department of Justice, and even some courts take a hardline view on when a taxpayer, to avoid failure-to-file and failure-to-pay penalties, may establish reasonable cause by relying on a tax adviser, pointing to the Supreme Court's opinion in Boyle, 469 U.S. 241 (1985), as support for denying a reasonable-cause claim. Tax advisers, therefore, should take heed to ensure that they adequately explain, in any reasonable-cause request, why Boyle does not preclude penalty relief in appropriate cases, as demonstrated by the recent Third Circuit opinion in Estate ofThouron, 752 F.3d 311 (3d Cir. 2014).

Background

Sec. 6651(a)(1) imposes a civil penalty for late filing of a tax return of 5% per month of the net amount due, up to a maximum of 25%, unless the failure to timely file is shown to be "due to reasonable cause and not due to willful neglect." Similarly, Sec. 6651(a)(2) provides a civil penalty for late payments of tax of 0.5% per month of the unpaid balance, up to a maximum of 25%, unless the failure to timely pay is shown to be "due to reasonable cause and not due to willful neglect."The IRS also frequently assesses various information return penalties for late filings, including late Forms 5471, Information Return of US. Persons With Respect to Certain Foreign Corporations, and 5472, Information Return of a 25% Foreign-Owned US. Corporation or a Foreign Corporation Engaged in a US. Trade or Business.

In these situations, the IRS considers a delay to be due to reasonable cause if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to timely file or pay (Regs. Sec. 301.6651-1(c)). The penalty handbook in the Internal Revenue Manual (IRM) ([section]20.1) provides the primary reference source for IRS employees working on penalty issues, including reasonable-cause determinations. The IRM provides that ordinary business care and prudence is generally the level of care that a reasonably prudent person would use in conducting business (see IRM [section]20.1.1.3.1.2(1)). In determining whether the taxpayer exercised ordinary business care and prudence, IRS employees are instructed to review the following available information: (1) the taxpayer's reason for the noncompliance; (2) the...