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Penalty Relief

How To Avoid IRS Penalties

Anyone who has ever encountered a tax problem with the IRS or a state-taxing agency knows the magnitude of the penalties levied by the government for non-compliance. Because of the rapid accrual of high tax penalties and interest, what starts as a manageable tax problem can quickly escalate to unmanageable levels. Our tax attorneys are often asked to help clients deal with tax penalty issues.

The Internal Revenue allows you to avoid penalties if you have a good excuse, known as reasonable cause. The following information is excerpted directly from the Internal Revenue Manual, IRM 120.1.

Reasonable Cause

  1. Reasonable cause is based on all the facts and circumstances in each situation and allows the Service 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 is unable to comply with those obligations
  2. In the interest of equitable treatment of the taxpayer and effective tax administration, the nonassertion 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 Part 120.1.
  3. 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 was unable to comply with a prescribed duty within the prescribed time, will be considered.
  • See IRM Exhibit 120.1.1-2, Penalty Relief-Application Chart. If a reasonable cause provision applies only to a specific Code section, that reasonable cause provision will be discussed in the IRM 120.1 chapter relating to that IRC section.
  • When considering the information provided in the following pages, remember that an acceptable explanation is not limited to those given in IRM 120.1. Penalty relief granted because the taxpayer provided an “other acceptable explanation” is identified by use of PRC 30 on either the closing or adjustment document.
  • 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 Code 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.

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