Generally, relief from penalties falls into four separate categories:
Correction of Service Error
Appeals may recommend the abatement or non-assertion of a penalty based on these four criteria as well as “Hazards of Litigation.”
This chapter discusses each of these categories and the related criteria. Also, see LEM 188.8.131.52.
In the interest of fairness, the IRS will consider requests for penalty relief received from third parties, including requests from representatives without an authorized power of attorney. While information may be accepted, NO taxpayer information may be discussed with a third party, unless a power of attorney or other acceptable authorization is secured in writing from the taxpayer. See LEM 184.108.40.206.
If additional information is needed, contact the taxpayer or the taxpayer?s authorized representative.
If the validity of the request is questionable, contact the taxpayer.
In all cases involving third party requests for penalty relief, advise the taxpayer of the request and the action taken.
Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but nevertheless is unable to comply with those obligations.
In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the Internal Revenue Code (IRC), Regulations (Treas. Regs.), Policy Statements, and IRM Part 20.1.
Reasonable cause relief is not available for all penalties; however, other exceptions may apply.
For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.
If a reasonable cause provision applies only to a specific Code section, that reasonable cause provision will be discussed in the IRM 20.1 chapter relating to that IRC section. See Exhibit 20.1.1-2. , Penalty Relief-Application Chart.
When considering the information provided in the following pages, remember that an acceptable explanation is not limited to those given in IRM 20.1, Penalty Handbook. Penalty relief granted because the taxpayer provided an “other acceptable explanation” is identified by use of PRC 030 (Penalty Reason Code) on either the closing or adjustment document, or on the Master File with a TC 290 .00 (with the related penalty TC for .00, such as TC 180 .00), and RC 062.
The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer?s failure to comply with the law was not due to willful neglect. See specific IRM sections for the rules that apply to a specific IRC section.
Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this section, See IRM 220.127.116.11.
What happened and when did it happen?
During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?
How did the facts and circumstances prevent the taxpayer from complying?
How did the taxpayer handle the remainder of their affairs during this time?
Once the facts and circumstances changed, what attempt did the taxpayer make to comply?
Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer?s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.
Standards and Authorities
Any reason that establishes a taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply with the tax law may be considered for penalty relief.
The following Treasury Regulations, under the Code of Federal Regulations (CFR), contain examples of circumstances that may be helpful in determining if a taxpayer has established reasonable cause:
Accuracy-Related Penalty: Treas. Reg. 1.6664?4
Failure to Pay Penalty: Treas. Reg. 301.6651?1
Failure to File Penalty: Treas. Reg. 301.6651?1
Failure to Deposit Penalty: Treas. Reg. 301.6656?1
Information Returns Penalty: Treas. Regs. 301.6723?1A(d) and 301.6724?1
Preparer/Promoter Penalties: Treas. Regs. 1.6694?2(d) and 301.6707?1T.
The following Internal Revenue Service Policy Statements contain specific criteria that may affect the imposition of penalties (see IRM 18.104.22.168):
P?2?4, Penalties and interest not asserted against Federal agencies. ( IRM 22.214.171.124.2)
P?2?7, Reasonable cause for late filing of return or failure to deposit or pay tax when due. ( IRM 126.96.36.199.3)
P?2?11, Certain unsigned returns will be accepted for processing. ( IRM 188.8.131.52.6)
Ordinary Business Care and Prudence
Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that they exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law.
In determining if the taxpayer exercised ordinary business care and prudence, review available information including the following:
Taxpayer?s Reason. The taxpayer?s reason should address the penalty imposed. To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based. If the dates and explanations do not correspond to the events on which the penalties are based, request additional information from the taxpayer that may clarify the explanation ( See IRM 184.108.40.206.1 ).
Compliance History. Check the preceding tax years (at least three) for payment patterns and the taxpayer?s overall compliance history. The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care. If this is the taxpayer?s first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for reasonable cause, since a first- time failure to comply does not by itself establish reasonable cause.
Length of Time. Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance ( See IRM 220.127.116.11.1). Consider: (1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer?s control, and (3) when the taxpayer complied with the law.
Circumstances Beyond the Taxpayer?s Control. Consider whether or not the taxpayer could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer?s control, the taxpayer was unable to timely meet the tax obligation. The taxpayer?s obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late.
Abatement of a penalty because the taxpayer established ordinary business care and prudence but nevertheless was unable to comply timely is identified by the use of PRC 022.
Ignorance of the Law
In some instances taxpayers may not be aware of specific obligations to file and/or pay taxes. The ordinary business care and prudence standardrequires that taxpayers make reasonable efforts to determine their tax obligations.
Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances. For example, consider:
The taxpayer?s education,
If the taxpayer has been subject to the tax,
If the taxpayer has been penalized before,
If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know, and/or
The level of complexity of a tax or compliance issue.
Reasonable cause should never be presumed, even in cases where ignorance of the law is claimed.
The taxpayer may have reasonable cause for noncompliance if:
A reasonable and good faith effort was made to comply with the law, or
The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement.
Mistake was Made
The taxpayer may try to establish reasonable cause by claiming that a mistake was made. Generally, this is not in keeping with the ordinary business care and prudence standard and does not provide a basis for reasonable cause.
However, the reason for the mistake may be a supporting factor if additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence.
The taxpayer may try to establish reasonable cause by claiming forgetfulness or an oversight by the taxpayer, or another party, caused the noncompliance. Generally, this is not in keeping with ordinary business care and prudence standard and does not provide a basis for reasonable cause.
Relying on another person to perform a required act is generally not sufficient for establishing reasonable cause.
It is the taxpayer?s responsibility to file a timely return and to make timely deposits or payments. This responsibility cannot be delegated.
Information to consider when evaluating a request for an abatement or non-assertion of a penalty based on a mistake or a claim of ignorance of the law includes, but is not limited to:
When and how the taxpayer became aware of the mistake.
The extent to which the taxpayer corrected the mistake.
The relationship between the taxpayer and the subordinate (if the taxpayer delegated the duty).
If the taxpayer took timely steps to correct the failure after it was discovered.
The supporting documentation.
Death, Serious Illness, or Unavoidable Absence
Death, serious illness, or unavoidable absence of the taxpayer may establish reasonable cause for filing, paying, or depositing late for the following:
An individual: If there was a death, serious illness, or unavoidable absence of the taxpayer or a death or serious illness in the taxpayer?s immediate family (i.e. spouse, sibling, parents, grandparents, children). PRC 024 indicates the incident occurred to the individual or a member of that individual?s immediate family for filing, paying, or depositing.
A corporation, estate, trust , etc.: If there was a death, serious illness, or other unavoidable absence of the taxpayer (person responsible), or a member of such taxpayer?s immediate family, and that taxpayer had sole authority to execute the return, make the deposit, or pay the tax . PRC 026indicates the incident occurred to the person responsiblefor filing, paying or depositing.
If someone other than the taxpayer, or the person responsible, is authorized to meet the obligation, consider the reasons why that person did not meet the obligation when evaluating the request for relief. In the case of a business, if only one person was authorized, determine whether this was in keeping with ordinary business care and prudence.
Information to consider when evaluating a request for penalty relief based on reasonable cause due to death, serious illness, or unavoidable absence includes, but is not limited to, the following:
The relationship of the taxpayer to the other parties involved.
The date of death.
The dates, duration, and severity of illness.
The dates and 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 absence.
Unable to Obtain Records
Explanations relating to the inability to obtain the necessary records may constitute reasonable cause in some instances, but may not in others.
Consider the facts and circumstances relevant to each case and evaluate the request for penalty relief.
If the taxpayer was unable to obtain records necessary to comply with a tax obligation, the taxpayer may or may not be able to establish reasonable cause. Reasonable cause may be established if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer?s control they were unable to comply.
Information to consider when evaluating such a request includes, but is not limited to, an explanation as to:
Why the records were needed to comply.
Why the records were unavailable and what steps were taken to secure the records.
When and how the taxpayer became aware that they did not have the necessary records.
If other means were explored to secure needed information.
Why the taxpayer did not estimate the information.
If the taxpayer contacted the IRS for instructions on what to do about missing information.
If the taxpayer promptly complied once the missing information was received
This is directly for the penalty handbook from IRS
An undue hardship may support the granting of an extension of time for paying a tax or deficiency. Treas. Reg. 1.6161?1(b), provides that an undue hardship must be more than an inconvenience to the taxpayer. The taxpayer must show that they would sustain a substantial financial loss if forced to pay a tax or deficiency on the due date.
The extension of time to pay does not provide the taxpayer with an extension of time to file. Nor does the extension of time to pay relieve the taxpayer of any appropriate penalties (see IRM 18.104.22.168.9).
Undue hardship generally does not affect a person?s ability to file and therefore would not provide a basis for penalty relief in a failure to file situation. However, each request must be considered on a case-by-case basis. Undue hardship may establish reasonable cause for failure to file on magnetic media, under Treas. Reg. 301.6724?1.
Undue hardship may also support relief from the addition to tax for failure to pay tax if the explanation for the noncompliance supports such a determination. However, the mere inability to pay does not ordinarily provide the basis for granting penalty relief. Under Treas. Reg. 301.6651?1(c), the taxpayer must also show that they exercised ordinary business care and prudence in providing for the payment of the tax liability.
The taxpayer may claim that enough funds were on hand but, as a result of unanticipated events, the taxpayer was unable to pay the taxes.
Consider an individual taxpayer?s inability to pay a factor when considering penalty relief if the taxpayer shows that, had the payment been made on the payment due date, undue hardship (as defined in Treas. Reg. 1.6161?1(b)) would have resulted. In the case where a taxpayer files bankruptcy, consider inability to pay a factor if the insolvency occurred before the tax payment date.
If a payroll was met, taxes were withheld and should be available for deposit. Employers must reserve money withheld from employees? wages in trust until deposited. The employer should not use the money for any other purpose. Undue hardship does not support relief from the IRC section 6672, Failure to Collect and Pay Over Tax, or attempt to Evade or Defeat Tax (Trust Fund Recovery Program).
Information to consider when evaluating a request for penalty relief includes, but is not limited to, the following:
When did the taxpayer know they could not pay?
Why was the taxpayer unable to pay?
Did the taxpayer explore other means to secure the necessary funds?
What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements?
Did the taxpayer pay when the funds became available?
An abatement of a penalty because the taxpayer experienced an “undue hardship” is identified by the use of PRC 029.
This section discusses three basic types of advice:
Written advice provided by IRS
Oral advice provided by IRS
Advice provided by a tax professional
Information to consider when evaluating a request for abatement or non-assertion of a penalty due to reliance on advice includes, but is not limited to, the following:
Was the advice in response to a specific request and was the advice received related to the facts contained in that request?
Did the taxpayer reasonably rely on the advice?
The following instances address some situations where penalty relief may not be appropriate even though the taxpayer relied on written advice from the IRS regarding an item on a filed return.
The taxpayer did not reasonably rely on the advice regarding an item included on a return if the advice was received after the date the return was filed;
A taxpayer may be considered to have reasonably relied on advice received after the return was filed if they then filed an amended return that conformed with such written advice
A taxpayer may not be considered to have reasonably relied on written advice unrelatedto an item included on a return, such as advice on the payment of estimated taxes, if the advice is received after the estimated tax payment was due.
Did the taxpayer provide the IRS or the tax professional with adequate and accurate information?
The taxpayer is entitled to penalty relief for the period during which they relied on the advice. The period continues until the taxpayer is placed on noticethat the advice is no longer correct or no longer represents the Service?s position.
The taxpayer is placed on noticeas the result of any of the following events that present a contrary position and occur after the issuance of the written advice:
Written correspondence from the IRS that its advice is no longer correct or no longer represents the IRS?s position;
Enactment of legislation or ratification of a tax treaty;
A U.S. Supreme Court decision;
The issuance of temporary or final regulations; or
The publication of a revenue ruling, revenue procedure, or other statement in the Internal Revenue Bulletin.
Generally, Form 843, Claim for Refund and Request for Abatement, is required to be filed to request penalty abatement based on erroneous advice.. However, if Form 843 is not filed and the information provided demonstrates that abatement of the penalty is warranted, the penalty should be abated, whether or not a Form 843 is provided.
Written Advice from the IRS
The IRS is required by IRC section 6404(f) and Treas. Reg. 301.6404?3 to abate any portion of any penalty attributable to erroneous written advice furnished by an officer or employee of the IRS acting in their official capacity.
If the taxpayer does not meet the criteria for penalty relief under IRC section 6404(f), the taxpayer may qualify for other penalty relief. For instance, taxpayers who fail to meet all of the above criteria may still qualify for relief under reasonable cause if the IRS determines that the taxpayer exercised ordinary business care and prudence in relying on the IRS?s written advice.
Penalties abated as a result of reliance on erroneously written advice from the IRS should be identified by PRC 044, Statutory Exception.
Oral Advice from IRS
The IRS may provide penalty relief based on a taxpayer?s reliance on erroneous oral advice from the IRS. The IRS is required by IRC section 6404(f) and Treas. Reg. 301.6404?3 to abate any portion of any penalty attributable to erroneously written advice furnished by an employee acting in their official capacity. Administratively, the IRS has extended this relief to include erroneous oral advice when appropriate.
In addition to considering the criteria provided in Treas. Reg. 301.6404?3, consider the following:
Did the taxpayer exercise ordinary business care and prudence in relying on that advice?
Was there a clear relationship between the taxpayer?s situation, the advice provided, and the penalty assessed?
What is the taxpayer?s prior tax history and prior experience with the tax requirements?
Did the IRS provide correct information by other means (such as tax forms and publications)?
What type of supporting documentation is available?
The following are types of supporting documentation:
A notation of the taxpayer?s question to the IRS,
Documentation regarding the advice provided by the IRS,
Information regarding the office and method by which the advice was obtained,
The date the advice was provided, and
The name of the employee who provided the information.
Penalties abated as the result of reliance on erroneous oral advice provided by the IRS should be identified by using PRC 031.
Advice from a Tax Advisor
Reliance on the advice of a tax advisor generally relates to the reasonable cause exception in IRC section 6664 for the accuracy-related penalty under IRC section 6662. (See IRM 20.1.5, Return Related Penalties, and Treas. Reg. 1.6664?4(c))
However, in very limited instances, reliance on the advice of a tax advisor may provide relief from other penalties when the tax advisor provides advice on a substantive tax issue.
The employer researched all available IRS publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were “contract labor” or employees. As a result, the tax advisor advised the employer that the workers were ” contract labor” . However, the IRS later determined that the workers were “employees” and not “contract labor ” .
Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer?s responsibility to file, pay, or deposit taxes cannot be excused by reliance on the advice of a tax advisor.
Fire, Casualty, Natural Disaster, or Other Disturbance
Relief from a penalty may be requested if there was a failure to timely comply with a requirement to file a return or pay a tax as the result of a fire, casualty, natural disaster, or other disturbance.
Relief from a penalty because the taxpayer suffered from a fire, casualty, natural disaster, or other disturbance should be identified by the use of the appropriate PRC. It could be that as a result of the fire the taxpayer was unable to access their records ( PRC 025) or as the result of an accident, the responsible party was hospitalized and unable to file the return or pay the tax ( PRC 024 (IMF) or 026 (BMF)).
Fire, casualty, natural disaster, or other disturbance are factors to consider. One of these circumstances by itself does not necessarily provide penalty relief.
Penalty relief may be appropriate if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer?s control they were unable to comply with the law.
Factors to consider include:
Effect on the taxpayer?s business.
Steps taken to attempt to comply.
If the taxpayer complied when it became possible.
The determination to grant relief from each penalty must be based on the facts and circumstances surrounding each individual case.
Official Disaster Area
When a significant disaster occurs affecting a wide area of taxpayers, the IRS often issues special instructions to facilitate evaluating the request for penalty relief.
Because these are one-time instructions, they will not be incorporated in this IRM. Territories, Campuses, and Customer Service sites will be kept informed of any special instructions affecting their areas.
Penalty Relief granted because the taxpayer was located in an Official Disaster Area is identified by the use of PRC 028.
An IRS error can be any error made by the IRS in computing or assessing tax, crediting accounts, etc. See Exhibit 20.1.1-3. , Penalty Reason Code Chart, for the appropriate PRC to be used when abating either a systemically-generated or manually-input penalty.
General Service Error (systemically generated? PRC 015). This PRC is used to identify penalties abated as the result of a Master File Recovery.
When an analyst from any area of the IRS identifies a computer programming application that caused a penalty to be assessed in error, that analyst should work with an analyst from Servicewide Penalties to:
Contact Modernization & Information Technology Services (MITS) to resolve the inadequate computer application, and
Include on the Work Request (WR) a statement indicating that PRC 015 must be used to identify any abatement of a penalty resulting from reversal of the computer application.
Other Service Error (manual input?PRC 045). This PRC should be used to identify penalties abated as the result of IRS errors that occur individually. Some examples are:
A math error when manually computing a penalty,
An extension of time to file that did not post to the Master File, or
Any other error, when it can be shown that; (1) the taxpayer did in fact comply with the law, and (2) the IRS did not initially recognize that fact.
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