Reasonable Cause IRS Penalty Relief
Reasonable cause, as the term implies, refers to situations where the taxpayer was hindered in meeting their tax obligations due to circumstances beyond their control.
To establish reasonable cause, you must provide a valid reason and supporting documentation. Reasonable cause can only be established if you are able to prove that you applied ordinary care and prudence in fulfilling your tax obligations.
Circumstances that may be deemed reasonable cause include:
- Death of a close family member or personal family disaster
- Serious illness or injury of the taxpayer or the taxpayer’s family
- Unavoidable absence of the taxpayer
- Fire, casualty, natural disaster, or other disturbance
- Financial hardship (with regards to failure to pay)
- Inability to obtain records required to file, pay or deposit taxes, especially if this inability was beyond the taxpayer’s control (e.g. fire or burglary)
- Failure of an employee or an accountant delegated to file, pay or deposit
- A mistake on the part of the taxpayer, despite taking ordinary care and exercising prudence
- Erroneous advice from the IRS or from another party, which caused the taxpayer to incur a penalty
When considering these cases, the IRS first evaluates whether the reason provided is compelling. An IRS Penalty Handbook itemizes the various penalties and possible reasons for reducing a penalty.
Beyond the basic rationale, the IRS will screen the application for penalty relief against the following criteria:
- The taxpayer’s past compliance with filing and paying taxes
- The length of time that passed before the taxpayer filed, paid or deposited the required taxes
- Whether the circumstance cited as the cause for not filing, paying or depositing on time were truly out of the taxpayer’s control
The IRS applies a very strict reading of the penalty handbook in considering applications for reasonable cause penalty relief. If you are applying for penalty abatement in this category, it’s important to know and cite the relevant policies in your application.
Other Options for IRS Penalty Relief
As mentioned, reasonable cause is not the only valid argument for IRS tax penalty relief. There are a number of other scenarios under which the IRS may abate penalties. These include:
- Ignorance of the law
- A handful of statutory exceptions covered by the Internal Revenue Code, which include service in combat zones and reasons related to federally declared disasters
- Administrative waivers, which can provide umbrella abatement for penalties incurred due to specific conditions recognized by the IRS, such as delays by the IRS in publishing guidance or mailing forms
The above circumstances are rare and not viable for many taxpayers. However, if you meet certain criteria, you may be eligible for First Time Abatement, the most widely-available administrative waiver of IRS penalties.
To be eligible for First Time Abatement, you must:
- Have a clean compliance history over the past three years
- Have filed all currently required returns or an extension
- Have paid or arranged to pay any IRS tax due
Most taxpayers have a better chance of securing First Time Abatement than any other form of relief from IRS penalties.
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