Reasonable Cause for Abatement of Penalties

One of the most common and costly problems taxpayers encounter is penalties and interest that the IRS can add onto original tax amounts. The IRS can impose penalties for filing your tax return late, paying your taxes after the due date, and failing to deposit estimated tax payments. If they are not paid, penalties and interest can double your IRS bill in about seven years. One way that you can get these penalties abated is to demonstrate reasonable cause. The IRS considers you to have Reasonable Cause for failing to file your taxes or paying the amount due if you can demonstrate that you “used all ordinary business care and prudence to meet your Federal tax obligations but were nonetheless unable to do so.” In this blog, I will discuss penalty relief due to Reasonable Cause.

Typical Situations for Reasonable Cause

If you’ve failed to file your return, make a deposit, or pay a tax when it was due, the IRS will consider any sound reason that establishes your inability to do so, including:

• Fire, casualty, natural disaster, or other calamities
• Inability to obtain records
• Death, serious illness, incapacitation or unavoidable absence of the taxpayer or the taxpayer’s immediate family
• Unavoidable postal delays or absence from the United States
• Any other reason that shows you exercised all due diligence to meet your Federal tax obligations but were nonetheless unable to do so due to something that was outside of your control

A lack of funds by itself is not sufficient cause to avoid the penalty for failure to pay taxes when due, but it can be reasonable cause if payment of the taxes would create an undue economic hardship so that you would be unable to pay your basic living expenses. The IRS will likely waive the penalty if you also exercise ordinary business care and prudence in providing for the payment of the tax liability, such as by exploring other means to secure the necessary funds, and pay the taxes when the funds become available.