|
How To
Avoid Civil Penalties
I am often asked about how you might be able to avoid
paying civil tax penalties imposed on you by IRS. In the case of the most common
penalties — those for lateness in filing your tax return or paying your tax
liability — the penalty may be excused by IRS if you can establish
“reasonable cause” for your actions. Reasonable cause can also excuse a
variety of other civil tax penalties.
What types of events will support a reasonable cause
claim? The following are the most common that have been successful:
- (1) Erroneous information was given the taxpayer by
an IRS employee or publication. If this occurred in your case, you would be
in the strongest position if you kept detailed records of the phone call,
meeting, or publication in which IRS erred.
- (2) Erroneous information was given the taxpayer by
a tax practitioner. General reliance on a tax expert for tax help doesn't
relieve a taxpayer who will be considered to be aware of commonly-known
facts such as the filing and payment deadlines. However, where a tax expert,
for example, incorrectly advised taxpayer that he is not obligated to file
or that he will have no tax liability upon an analysis of the tax law, the
reasonable cause excuse may be available.
- (3) Death or serious illness of the taxpayer or a
member of his immediate family.
You may qualify for payment extensions due to financial
hardship. However, by itself, financial hardship has rarely been found to
support a reasonable cause excuse. IRS, and some courts, support a “bright
line” rule under which financial difficulties can never be reasonable cause
for purposes of the penalty for failure to pay taxes, but other courts have not
been willing to go quite that far.
The following, on the other hand, won't establish
reasonable cause:
- (1) Lack of necessary information to prepare the tax
return.
- (2) General overwork, stress, or health problems of
the taxpayer or tax return preparer.
- (3) Ignorance of the law (not based on the advice of
a tax expert). In some cases, however, where the taxpayer's mistaken belief,
e.g., that he was not required to file, was “reasonable” or due to
extraordinarily complex tax concepts, reasonable cause was found.
- (4) Constitutional, religious, etc., objections.
Philosophical arguments, such as the tax laws are unconstitutional, are
consistently given short shrift by the courts and IRS.
If you are filing or paying late but can establish
reasonable cause, don't wait for the penalties to be assessed. A statement
establishing reasonable cause for your situation should be attached to the
return and may prevent the penalties from the start. If you would like me to
help you draft the statement to present your situation in the most favorable
light, please call.
If IRS has already added civil penalties on top of your
tax liability, there are two reasons you should call. First, I can review IRS's
calculation of the penalties. Second, we should discuss whether your
circumstances are explainable in a way that could support a reasonable cause
excuse.
I hope the above is helpful. If you need additional
information, please call.
|
Offer in Compromise and Related Topics
Explained
Just enter your e-mail address below and then click the Learn More Button.
|
|
|
|
|
