What Is IRS Reasonable Cause Penalty Abatement?

According to Chapter 20 of the Internal Revenue Manual, reasonable cause for penalty abatement exists if a taxpayer was unable to comply with their tax obligations despite exercising “ordinary business care and prudence.” This is a rather broad definition, which creates a bad-news/good-news situation.

The bad news is that there’s little official guidance from the IRS on the exact set of circumstances that constitutes reasonable cause. The IRS only states that it evaluates each request on the facts and circumstances of each individual case.

The good news is that because of the “squishiness” of the reasonable cause criteria, how well you present your arguments to the IRS is just as important as the facts leading to the penalty. This is why, if you’re thinking about requesting penalty abatement for reasonable cause, you should first contact Tax Network USA. Our tax professionals have handled numerous reasonable cause cases, so we understand which arguments work best.

Key Takeaways

What constitutes reasonable cause – Reasonable cause exists if the taxpayer couldn’t meet their tax requirements despite using “ordinary business care and prudence.”
Deciding if reasonable cause exists – Key factors that support the existence of reasonable cause include: a history of tax compliance, events a taxpayer had no control over that led to tax noncompliance, and the taxpayer taking reasonable steps to meet their tax obligations despite intervening events.
Examples of reasonable cause – The IRS commonly concludes reasonable cause exists if there’s a death in the immediate family, the taxpayer suffers a serious illness, there’s a catastrophic disaster, the taxpayer lacks access to necessary documents, or the IRS gave the taxpayer wrong tax information.
Many reasonable cause requests can go either way – Given the broad definition of reasonable cause, many reasonable cause penalty relief requests depend on how effectively the taxpayer can present and support their arguments.
Penalty abatement appeal – The IRS’s decision to deny a reasonable cause penalty abatement request can be appealed to the IRS Office of Independent Appeals.

What Does “Reasonable Cause” Really Mean?

In legal terms, a “reasonable cause” is a legal standard used to justify a specific decision, action, or relief from penalties. It means having an objective, justifiable reason based on facts that would lead a person to act the same way. In tax laws, this means a taxpayer exercised ordinary business care and prudence but still wasn’t able to meet tax obligations.

Here are some of the types of facts the IRS considers when determining what constitutes reasonable cause:

History of tax compliance. If the IRS sees similar penalties imposed in the past, the IRS will question whether the taxpayer is doing everything they reasonably can to stay compliant.
Timing of tax noncompliance. The more time that passes between the event that prevents tax compliance and the moment the taxpayer tries to comply with their tax obligations, the less likely the IRS is to find reasonable cause.
Control over what happened. The less control the taxpayer had over the event(s) that led to noncompliance, the more likely the IRS is to view it as a reasonable cause.
The ability to anticipate what happened. Even if a taxpayer couldn’t have prevented what occurred, if the taxpayer could have taken reasonable steps to comply with their tax obligations ahead of time, the IRS is less likely to agree to reasonable cause penalty abatement.
Tax knowledge. The more tax knowledge a taxpayer has, the more difficult it will be for the IRS to accept that the taxpayer’s misunderstanding of the law should excuse the noncompliance.

Circumstances That May Qualify as Reasonable Cause

The IRS doesn’t have an explicit list of situations that warrant reasonable cause penalty relief. Yet there are reasons that the IRS is more likely to accept if they apply to you. Some of these are:

Serious health problems. You or a member of your immediate family endures a significant medical issue that prevents you from meeting your tax obligations.
Death in the immediate family. If you or an immediate family member dies, the IRS may consider that to be a reasonable cause.
Fire, casualty, or natural disaster. The IRS often grants penalty relief if your tax noncompliance was the result of an officially declared disaster, such as fire, flood, hurricane, or earthquake.
Inability to obtain necessary documents. The unavailability of documents needed to meet tax obligations must be due to circumstances outside your control. The IRS will consider what steps you took to obtain the records, when and how you learned the records weren’t available, and why you couldn’t estimate the missing information.
Inaccessible tax notices. If a disability prevents you from reading a tax notice that explains a tax requirement you didn’t comply with, then reasonable cause may exist.
Incorrect advice from the IRS. Reasonable cause can exist if your reliance on written or oral tax advice from the IRS was reasonable when applying the ordinary business care and prudence standard.

Situations That Don’t Count as Reasonable Cause

If any of the following reasons explain your failure to comply with your tax responsibilities, the IRS is unlikely to grant you penalty relief based on reasonable cause.

Not having enough money. If you can’t afford to pay your taxes, the IRS expects you to use other tax resolution options, such as an Offer in Compromise or an installment agreement.
Forgetting to file or pay taxes. Not knowing you had to pay certain taxes or file required paperwork isn’t a reasonable cause unless the forgetfulness stems from an extraordinary event that qualifies as reasonable cause.
Relying on someone else. Assuming a spouse, business partner, or tax professional you hired will handle your taxes, by itself, won’t count as reasonable cause. The IRS holds you accountable for your tax return even when you pay someone to file on your behalf.
Being too busy. Life can get hectic for almost everyone. Unless being overwhelmed is the result of an event that, by itself, counts as a reasonable cause (such as the death of a close family member), the IRS is unlikely to remove the penalty because you were too busy.
Ignorance of the law. You’re required to take steps to learn your tax obligations. Failing to do so will not prevent the imposition of penalties unless you still misunderstand the law even after you have taken reasonable steps to learn your tax obligations.
Mistakes and oversights: You’re responsible for ensuring your tax returns, payments, and deposits are correct and on time. In some cases, a reasonable cause may apply to a mistake if additional facts and circumstances show that you tried to comply with the law.

There’s another situation where the IRS probably won’t grant penalty abatement for reasonable cause. It exists where you have reasonable cause for noncompliance, but once that reason goes away, you take an unreasonable amount of time to either request penalty abatement or try to fulfill your tax duties. For example, if you received incorrect oral advice from the IRS in February but waited until October to correct the error, the IRS may not grant penalty relief.

“Gray” Cases: When Reasonable Cause May or May Not Exist

There are many “50/50” cases where the penalty relief decision isn’t black or white. Cases like these are where a tax professional can really be useful. Below are a few examples where properly crafting and supporting your argument can shift the odds in your favor.

Suffering a serious illness that doesn’t result in hospitalization.
Making a tax mistake after relying on advice from a tax professional.
Enduring a personal emergency, yet managing to continue working.

In these situations, your written argument is what determines the penalty relief outcome.

How To Present the Strongest Reasonable Cause Argument Possible

The reasonable cause explanation is the most critical part of your request when filing Form 843. The IRS receives hundreds of thousands of penalty relief requests, so your argument must be supported by documents and align with tax laws. Below are strategies that can increase your chances of receiving reasonable cause tax penalty relief:

Providing a timeline of what happened that clearly identifies when key events occurred.
Sending the IRS copies of every document to support the existence of an event that led to the tax noncompliance. This can include things like medical records, death certificates, emails, letters, or insurance claim documents.
Referencing applicable IRS regulations, rules, statutes, or case law.
Clearly identifying why you included a supporting document and where in your reasonable cause explanation it applies.
Explaining what you did once the critical event had passed, and/or the steps you took to meet your tax duties despite having to deal with the unforeseen event.

What If the IRS Denies My Penalty Abatement Request?

If the IRS denies your request, you can file an appeal with the IRS’s independent Office of Appeals. In most cases, you’ll have 30 days from the date of your rejection letter to appeal.

Reasonable Cause vs. First-Time Abate: Which Should You Use?

The First-time abate (FTA) is one of the most common administrative penalty waivers by the IRS, and it applies to taxpayers with a three-year timely compliance history. You do not need a reasonable cause for this kind of penalty relief. For the FTA, all you need to do is call the IRS using the number listed on the IRS notice. There’s no need to provide supporting documentation because the eligibility information should already be in your tax file.

In contrast, reasonable cause penalty abatement is usually only available by completing IRS Form 843, Claim for Refund and Request for Abatement, and providing additional documentation. Another thing to keep in mind is that the IRS will soon transition from FTA to Automatic Exemption Penalty (AEP). AEP is similar to FTA, except the IRS will automatically apply it if you’re eligible; there will be no need to formally request AEP.

Here are a few scenarios on when to use which penalty relief:

Use Reasonable Cause If	Use First-Time Abatement If
Your late filing or payment was caused by circumstances beyond your control.	You simply made a one-time mistake and have a good compliance history.
You have a valid explanation for missing a tax deadline.	You don’t have a specific reason for the mistake but meet the IRS’s eligibility requirements for an FTA.
You can explain exactly why you were unable to file or pay on time.	Your only qualification is that you’ve been compliant for the past three years.

Keep in mind that, unlike FTA, which you can typically apply only once within three years, you can request a reasonable cause relief multiple times if you have a reason for each penalty.

Get Penalty Abatement Help From a Tax Pro

Not just anyone can apply for IRS penalty abatement based on reasonable cause and get accepted. Thousands of requests get rejected even when there’s reasonable cause because of vague explanations and not enough supporting documents. It’s also common for many penalty relief requests to fall into “gray” or “50/50” cases, where how you make your request can make all the difference.

This is why it’s important to get professional tax help when applying. To know more about how we can help your penalty abatement tax case, contact us by calling (855) 225-1040 or using our online contact form.

Frequently Asked Questions (FAQs)

Here are common questions we get on reasonable cause penalty abatement:

Do you need to have documents to claim reasonable cause penalty relief?

Yes, you’ll need documents to support your reasonable cause arguments, as the IRS usually doesn’t accept a taxpayer’s word without supporting evidence. For instance, if there was a serious illness or death that led to a delay, then you might need to present a copy of a death certificate or medical records.

How long does the IRS take to make a decision regarding penalty relief?

It depends largely on how you make the request and the basis for the request. For example, a first-time abatement penalty can be resolved in one phone call to the IRS. On the other hand, a reasonable cause may take a few months for the IRS to evaluate your claim and supporting documents before providing feedback.

Can you ask for a reasonable cause penalty abatement even if you still owe the underlying tax?

Yes, the IRS can agree to grant penalty relief even if the underlying tax is not at issue. You don’t need to pay your tax bill in full before requesting the IRS to waive or reduce penalties.

Can I get reasonable cause penalty relief if the penalty stems from bad tax advice?

It’s possible. What counts as a reasonable cause will depend on several factors, such as the complexity of the tax issue, your good-faith attempts to learn what your tax obligations were, and whether this tax issue involves a recent tax change that you wouldn’t readily know.

Can reasonable cause penalty relief also reduce interest?

Yes, but only the interest that has accumulated in the penalty that’s being waived or eliminated. Interest that stems from the underlying taxes owed (or another penalty that hasn’t been removed) will remain.

Sources

– https://www.irs.gov/payments/penalty-relief

– https://www.irs.gov/payments/penalty-relief-for-reasonable-cause

– https://www.irs.gov/instructions/i843

– https://www.irs.gov/irm/part20/irm_20-001-001r

– https://www.irs.gov/appeals/penalty-appeal

– https://www.irs.gov/payments/administrative-penalty-relief