Though you may agree with the assessment of tax, you may be assessed significant penalties up to 25% to 50% of tax. Common penalties include the Failure to Pay, Failure to File and the Accuracy-Related penalty. Taxpayers should consider whether these penalties can be negotiated or removed independently of the actual taxes owed.
No penalty shall exist where taxpayers have established that, despite the exercise of ordinary business care and prudence, they were unable to comply due to circumstances beyond their control. The IRS looks for evidence that the taxpayer acted in good faith and the failure was not due to willful neglect. Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s non-compliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time. Other relevant factors include the taxpayer’s history of compliance and education level.
Death, serious illness, or unavoidable absence of the taxpayer, or in the taxpayer’s immediate family (spouse, sibling, parents, grandparents, children) establish reasonable cause. Factors include the relationship of the taxpayer to the other parties involve, date of death, duration and severity of illness, reasons for absence, how the event prevented compliance, if other business obligations were impaired, and if tax duties were attended to promptly when the illness passed, or within a reasonable period of time after a death or return from an unavoidable absence.
The taxpayer may try to establish reasonable cause by claiming they relied on another party to comply on their behalf or that another party (their accountant) provided erroneous advice. Generally, this is not a basis for reasonable cause alone, since the taxpayer is responsible for meeting their tax obligations and that responsibility generally cannot be delegated. However, other factors should be considered including whether the taxpayer was unable to comply because they did not have access to their own records and whether the failure to comply was due to a change in the tax law the taxpayer could not reasonably be expected to know.
Penalties may be settled based on hazards of litigation – uncertainties of the outcome of the court’s decision in the event of a trial. Unlike Collections, IRS Appeals may consider the hazards of litigation in attempting to reach a settlement. Proper use of this settlement authority given to Appeals is critical in fulfilling its mission as much of the settlement process is a judgment call based on experience. Appeals must evaluate the facts pertinent to the issue under consideration, the applicable law, and the potential outcome in the event the case is litigated based on the the factual, legal and evidence and must weigh these factors and determine an appropriate settlement range.
As you can see, the reasonable cause exception to penalties should be given careful consideration, even though the taxpayer may not be able to contest tax liability. If you are considering whether to pay penalties or appeal the assessment, please consult an experienced tax attorney knowledgeable in penalty negotiation and abatement.