there were a total of 15 taxpayer penalties indicated in the Internal Revenue
Code. By the last update of the IRS Penalty Handbook, in 2014, there were
over 150 unique penalties in the IRC that the Service could impose.
Most taxpayers will not encounter more than several of those penalties.
The ones that are the most frequently assessed fall into one of three
Failure to File
Failure to Pay
Failure to Deposit
taxpayers are upset about the penalties and ask about getting them removed or at
least reduced. They feel that they are unjust when charged on top of taxes
they are unable to pay. Other than going to Tax Court or District Court
(depending upon the type of underlying tax),
four methods for getting penalties removed:
Correction of IRS errors
(such as the First
three are usually fairly straightforward. They usually apply to only one tax
period, and are thus containerized to a specific tax type and return. For
example, the FTA applies only to the first tax period of a tax debt case if the
taxpayer is eligible for the abatement. Thus, these abatements are usually
The fourth category, on the other hand, is where the "significant" penalty
abatements most often occur. These penalties often cover more than one tax debt
period or year. If the facts support the reasonable cause standard, this
type of abatement can sometimes result in ALL penalties being abated. This is
not all that common, but outside of litigating the case, this may be the only
Pursuant to the
Internal Revenue Code (IRC), the IRS can assess
penalties for failure to file a tax return timely, failure to pay the tax
liability when due (normally, the due date for the return, a deposit due date
for employment taxes, and other situations), for filing an inaccurate return
(accuracy related penalty), of for a fraudulent return (IRC 6663 - intentional
underreporting of income or overstating expenses). There are numerous
penalties that Congress defined in the IRC that can be assessed. This page
will discuss the most common types of penalties.
Generally, a penalty
that is assessed can be abated (removed) if reasonable cause can be established
as the cause of the non-compliance. Proving reasonable cause can
be very challenging. Therefore, a tax professional should be retained to
maximize the probability of relief from penalties.
FOR PREPARERS: If your client is being assessed a
penalty based upon YOUR mistake, it may be wise for you to retain
another tax professional to represent your client. This
representative can more effectively argue detrimental reliance by
your client on your professional services and advice. If
you attempt on your own to get the penalty abated because of your
mistake, the IRS may view your efforts as self-serving and not
seriously consider the facts and circumstances. Getting your
client relieved of the penalty will generally reduce the potential
out-of-pocket cost to you for your mistake (or preclude you from
having to file a claim with your professional liability company to
reimburse the client).
of Certain Penalties
This is important to
remember. The Code requires managerial approval to be obtained by an Agent
or other IRS employee (like a Tax Compliance Officer) BEFORE communicating with
the taxpayer or authorized representative that a penalty is being proposed.
This is generally accomplished by the manager signing the penalty approval form.
Under Code Sec. 6751(a), IRS must provide information about any penalty it
imposes under the Code. Specifically, with each notice of a penalty, IRS must
include information with respect to the name of the penalty, the Code section
under which the penalty is imposed, and a computation of the penalty. Under Code
Sec. 6751(b)(1), no penalty can be assessed "unless the initial determination
of such assessment is personally approved (in writing) by the immediate
supervisor of the individual making such determination or such higher level
official as the Secretary may designate".
of a Revenue Agent Report (Form 4549) and the 30-day letter is often the first
indication of the IRS's intention to assert a penalty. The manager must
approve the proposed penalty BEFORE it is proposed to the taxpayer. In the
James Clay and Audrey Osceola, (2019) 152 TC No. 13,
the Tax Court
concluded that the manager signed the Penalty Approval Form AFTER the RAR and
the 30-day letter were issued to the taxpayer. Typically, filing a Freedom
of Information Act request will be the most effective way to get to see a copy
of the form and the date of managerial approval. If approved AFTER the RAR
was issued, then the penalty cannot be asserted.
Failure to File
Penalty. This is calculated based on the time from the deadline of your tax
return (including extensions) to the date you actually filed your tax return.
The penalty is 5% for each month the tax return is late, up to a total maximum
penalty of 25%. The percentage is of the tax due as shown on the tax return.
NOTE: If the Failure to Pay penalty is also being assessed, then the
Failure to File penalty is reduced to 4.5% for each month the Failure to Pay
applies as well. In other words, the MAXIMUM combined Failure to File and
Failure to Pay penalties is 5% per month.
Failure to Pay
Penalty. This is calculated based on the amount of tax you owe. The penalty
is 0.5% for each month the tax is not paid in full. The penalty runs for
48 months maximum (from the due date of the return).
Penalty. There is an estimated tax penalty that has to be paid if you
underpay your estimated tax. This penalty is in the form of interest on the
underpayment for the period the underpayment took place. Each payment incurs
different penalties; so you may have to pay tax penalties on an earlier payment
even if you had paid enough to cover the underpayment prior to that. In fact, if
you don't pay sufficient tax by the due date of each payment period, you may
have to pay a penalty even if the IRS has to pay you a refund on your filing
your tax return.
Penalty – IRC § 6662
In General, IRC § 6662
imposes an accuracy-related penalty on any portion of an underpayment
attributable to one or more of the following:
(1) negligence or disregard of the rules or regulations;
(2) any substantial understatement of income tax;
(3) any substantial valuation misstatement under Chapter 1 of the Code;
(4) any substantial overstatement of pension liabilities; and
(5) any substantial estate or gift tax valuation understatement.
penalty applies only if a return is filed, except that the penalty
does not apply in the case of a return prepared by the Secretary under IRC §
6020(b). IRC § 6664(b); see also Treas. Reg. § 1.6662-2(a). The taxpayer also
may not be subject to the accuracy-related penalty if the taxpayer had
reasonable cause and acted in good faith under IRC § 6664(c). The reasonable
cause and good faith exception under IRC § 6664(c) applies to all components of
the accuracy-related penalty, with special rules for a substantial
understatement attributable to a tax shelter item of a corporation.
penalty does not apply to any portion of an underpayment on which a penalty is
imposed for fraud under IRC § 6663.
The amount of the accuracy-related penalty is 20 percent of the portion of the
underpayment resulting from the misconduct. The penalty rate is increased to 40
percent in certain circumstances involving gross valuation misstatements.
Stacking of the accuracy-related penalties is not permitted. The maximum amount
of the accuracy-related penalty imposed on a portion of an underpayment of tax
is 20 percent (or 40 percent in the case of a gross valuation misstatement) of
that portion of the underpayment, even if that portion of the underpayment is
attributable to more than one type of misconduct proscribed under IRC § 6662.
The Service may, and should, however, assert the penalty for the underpayment
based on each prohibited behavior, in the alternative, that applies. For
example, if a portion of an underpayment is attributable to both negligence and
a substantial understatement of income tax, the Service may rely on both
theories (asserting the second theory in the alternative) in imposing the
penalty, although the maximum accuracy-related penalty that may be imposed is 20
percent of that portion of the underpayment. Treas. Reg. § 1.6662-2(c).
The accuracy-related penalty also does not apply to any portion of an
underpayment on which a penalty is imposed for fraud under IRC § 6663.
is calculated based on how much tax you owe. Interest rates change every three
months. As of January 1, 2008, the IRS interest rate for underpayments of tax is
7% per year.
The IRS has issued a
NOTICE that discusses interest and penalties. You can read that notice
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. Essentially, this means something beyond the control of the
taxpayer has occurred that has caused the failure to file or not pay taxes
timely. It also must be demonstrated that the taxpayer took reasonable steps to
"counter" the events and were still unable to pay and or file timely.
Although many of these
circumstance evoke great "empathy when heard," sympathy is not going to cause
the IRS to abate penalties. The case for abatement must be supported with
logical and or legal arguments. Additionally, each case is weighed on its
individual merits not on precedents of other cases. No precedence can be
cited on penalty abatements.
The IRS gives a
long list of events that will be considered for reasonable
cause. They are:
- Ignorance of
the Law (you must demonstrate you made a reasonable
effort to learn the law though)
- Error or
Mistake was Made, but you must still show "due
diligence, ordinary business care and prudence" have
but you must still show "ordinary business care and
Illness, Death, or Unavoidable Absence
- Unable to
Advice from a competent tax professional
advice directly from the IRS, written or oral.
Casualty, Natural Disaster, Other Disturbance
- Acts of God
Revenue Manual goes on to say that any reason will be
accepted as reasonable cause if it can be shown that the
taxpayer exercised ordinary business care and prudence and,
despite that, was still not able to comply with their tax
following list is taken from the IRM or Internal Revenue
Manual that gives the guidelines of what IRS agents are
instructed to look at when considering penalty abatement:
What are the events that happened, when did it
happen, and why did these events prevent you from
complying with the tax law?
How were your other affairs handled during this time?
Did the you (or does it appear) single out the IRS not
to be but paid other creditors? What steps were taken to
try and mitigate your circumstances? Ordinary business
care and prudence is closely looked at here.
Is there a direct "timeline" correlation between what
happened and the taxes being file late or not paid?
Is there a history of filing and or paying late? The
IRS is going to look at your history; repeat offenders
will have a tougher job convincing the IRS that this was
Were the circumstances "beyond the control of the
taxpayer" truly unavoidable, and could not be
anticipated? If so, this generally establishes
Documentation will be critical to make your case.
Provide as much proof of what you are arguing as
possible. The greater the amount of "third party"
evidence that can be produced, the better
the chances for relief.
How to Request
Abatement of a Penalty
There are several ways to request a penalty abatement:
A written protest, which is the most common method
and goes directly to an appeals officer
generally) who has settlement authority.
Verbally in person or over the telephone
IRS Form 843 - Usually a Form 843 is filed with a
written "brief" or protest
protest will comprise of a formally structured letter with
an introduction, the request for penalty relief under which
This would be followed by a statement of the facts
surrounding the case demonstrating the "reasonable cause"
and " ordinary business care" and as much third party
documentation of the facts.
Finally, any legal
or code related facts that would bolster your claim.
you submit a Penalty Abatement request and it is denied, you
cannot make a request on the same grounds again. Therefore
it is very important that you put forth the best case
possible when you submit. This is why it is important to
have professional representation.
Recent Tax Court Case:
Failure to timely file returns
penalties were upheld against married business owners for years they filed well
past applicable deadlines: IRS met its burden of production with proof of
taxpayers' delayed filings; and fact they suffered some medical problems in
subject years wasn't reasonable cause where problems weren't so sever as to keep
them from timely filing. (Douglas Bynum, Jr., et ux. v. Commissioner, (2008) TC
Memo 2008-14 , 2008 RIA TC Memo ¶2008-14 )
Court says bank
error (not employee error) may be reasonable cause to abate employment tax
Don Johnson Motors, Inc. v. U.S.,
DC TX, 101 AFTR 2d 2008-370, Civil Action No. B-06-047, 12/21/07
A Texas U.S. district court has
ruled that employment tax penalties and interest for the 1999-2002 tax years
could not be abated due to reasonable cause, even though the taxpayer was
unaware that its in-house accountant and its office manager had failed to
perform their payroll tax duties. However, there may be reasonable cause to
abate an employment tax assessment for the 2003-2004 tax years because of a bank
Facts. From 1999 to 2002, Don
Johnson Motors, Inc. (Don Johnson) delegated its payroll tax functions to an
in-house accountant, Michael Ezequiel, who performed his role under the
supervision of the company's office manager. Ezequiel prepared the company's
employment tax returns and was also in charge of monitoring the payroll accounts
and the information included on Forms 940 and 941. At some point in 1999, for
reasons not explained, Ezequiel stopped paying portions of the company's payroll
taxes to the IRS. As a result, Don Johnson Motors made incomplete deposits to
the IRS from 1999-2002. The executives of Don Johnson Motors were unaware of
this problem until December 2002. Shortly thereafter, the IRS assessed penalties
against the company for failure to file employment tax returns and to timely pay
Law. IRC §6651(a) allows an employer to avoid penalties for noncompliance if it
can show that its failure to file, pay, or deposit taxes was due to "reasonable
cause" and not willful neglect. Don Johnson Motors requested an abatement of the
aforementioned penalties based on IRC §6651(a) .
Ruling. The district court denied the taxpayer's abatement request. In issuing
its ruling, it noted that other federal courts have consistently held that the
failure of a taxpayer's employee to file or pay taxes does not establish
reasonable cause (e.g., see McMahan v. Commissioner, 114 F. 3d 366 (1997), and
Conklin Bros. of Santa Rosa, Inc. v. U.S., 986 F. 2d 315 (1993)).
The district court also distinguished the current ruling from In the Matter of
American Biomaterials Corporation, 69 AFTR 2d 92–611 (1992). In American
Biomaterials, the Third Circuit Federal Court of Appeals ruled that there may be
reasonable cause to abate employment tax penalties when corporate officers
commit criminal acts (e.g., embezzlement) against the corporation. The district
court distinguished the current ruling from that one by pointing out that Don
Johnson Motors had never presented any evidence that its in-house accountant and
its office manager had engaged in any criminal action. The district court said
that the employment tax deficiencies incurred by Don Johnson Motors simply
resulted from having “lax internal controls or failing to secure competent
external auditors that even the court in American Biomaterials stated was
insufficient to establish reasonable cause.”
The district court also rejected the taxpayer's argument that there was
reasonable cause to abate the penalties because of the lack of notification from
the IRS that the company was falling behind in its tax obligations. The court
cited IRC §6151 and said that the IRS was under no obligation to provide
taxpayers with notice that they failed to file their returns or pay their taxes.
The IRS also assessed penalties
against Don Johnson Motors for untimely employment tax deposits for the 2003 and
2004 tax years. The company was required to pay its taxes electronically using
the Electronic Federal Tax Payment System (EFTPS). The company was provided with
new software by its bank for EFTPS transactions. The bank sent one individual
over to Don Johnson to train the company on the software. The trainer had been
employed with the bank for two days. The software required the tax period to be
entered in two separate fields or the deposit would not be made by the bank.
This fact was not mentioned to company employees. Consequently, the bank did not
make any of the taxpayer's employment tax deposits for the period in question.
The IRS assessed penalties against Don Johnson Motors for failing to make its
deposits on a timely basis. An IRS revenue officer reviewed this situation and
determined that the assessment was proper. Don Johnson Motors appealed the
ruling to the district court.
The district court said that there may be reasonable cause to abate the
penalties because none of the previous rulings on this matter had considered the
bank's concession that it had failed to properly train Don Johnson employees.
The court also noted that: (1) Don Johnson had provided the bank with the
information necessary to make the company's employment tax deposits in a timely
manner, and (2) there were sufficient funds in the company's bank accounts to
make the deposits. According to the EFTPS handbook, these two facts provide
sufficient evidence to establish reasonable cause. As a result, the court
remanded the case back to the IRS for further consideration as to whether the
penalties should be abated.
Penalties in a
In a 2010 Tax Court case, the TC had
to consider the applicability of the penalties to partners because of the
partnership's participation in a tax shelter. Here is the Court's thinking
on the matter:
Alpha I, L.P. v. U.S., (Ct Fed Cl 5/27/2010) 105
AFTR 2d ¶2010-930
There are six accuracy-related
penalties in Code Sec. 6662 including negligence and substantial understatement
of income tax. Accuracy-related penalties are not cumulative. Thus, for example,
if a portion of an underpayment of tax required to be shown on a return is
attributable both to negligence and a substantial understatement of income tax,
the maximum accuracy-related penalty is 20% of such portion. ( Reg. §
1.6662-2(c)). This is sometimes referred to as the anti-stacking rule.
There is an absolute defense to
either of these penalties if the taxpayer shows that there was a reasonable
cause for such portion of the understatement and the taxpayer acted in good
faith with respect to it. ( Code Sec. 6664(c)(1) ). Additionally, the amount of
the substantial understatement penalty is reduced for any portion of the
understatement as to which the taxpayer can establish substantial authority for
the position that the taxpayer took. ( Code Sec. 6662(d)(2)(B)(i) ). If the
substantial understatement was the result of a tax shelter, the taxpayer may
reduce the amount owed by establishing that substantial authority exists for the
position taken and that the taxpayer reasonably believed that the reported
treatment of an item was more likely than not the proper treatment. ( Reg. §
Facts. In this case, Alpha I,
L.P., by and through Robert Sands, a Notice Partner in Alpha I, asked the Court
to summarily determine that the various taxpayers (numerous entities and their
members) were not subject to either a 20% negligence penalty or a 20%
substantial understatement penalty under Code Sec. 6662 for any underpayment of
tax resulting from their Code Sec. 465 concession. The government asked the
Court to summarily reach the opposite conclusion.
Specifically, the government
asserted that the taxpayers engaged in two Son of BOSS tax shelters, and that
the 20% substantial understatement penalty and the 20% negligence penalty apply
to any understatement of tax.
The taxpayers asserted that the
substantial understatement and negligence penalties were inapplicable because
they had substantial authority for the position in their initial returns and
because they relied in good faith on the advice of tax professionals.
The Court noted that it had
jurisdiction under the TEFRA unified audit rules but only with respect to the
applicability of penalties and defenses as they relate to the partnership. The
Court would not consider any penalties or defenses unique to any of the partners
individually. The Court said that the amount of any applicable penalties that
are payable by an individual partner must be resolved at the partner level, but
the underlying determination that an accuracy-related penalty is proper under
Code Sec. 6662 must be made in a partnership level proceeding.
In order to resolve the issue,
the Court had to determine whether the taxpayers were engaged in a tax shelter,
whether the substantial understatement or negligence penalties were applicable
to taxpayers, and whether the taxpayers had substantial authority for the
position taken. In order to reach these determinations, the Court had to
undertake a close examination of complex facts, decipher myriad statutory
provisions, and analyze numerous cases and other authorities interpreting those
After undertaking a detailed
examination of the facts and the law, the Court held that (1) the taxpayers were
engaged in a tax shelter, (2) the substantial understatement accuracy-related
penalty of Code Sec. 6662(b)(1) and the negligence accuracy-related penalty of
Code Sec. 6662(b)(1) apply, and (3) the substantial authority defense, the
reasonable basis defense and the reasonable cause and good faith defense were
not available to the taxpayers.
Penalty for Early
Distribution for a Retirement Fund
If you withdraw money from a pension
fund that you have contributed to over the years (usually getting a tax
deduction for the amount of your contribution - such as in a traditional IRA
account), you generally will treat the distribution as taxable income (ordinary
tax rates) - PLUS, pay a penalty of 10% of the amount withdrawn unless you meet
an exception to the imposition of the penalty.
Below is a 2010 Tax Court case that
pretty well sums up the exceptions to the penalty. Unfortunately for
petitioner in this case, he did not meet any of the exceptions and was hit with
the 10% penalty.
Code Section 72—10% additional tax on early retirement plan distributions—deemed
distributions—exceptions—separation from service.
Code Sec. 72(t) 10% additional tax was upheld against pro
se actuary/former New York State Dept. of Ins. employee who received deemed
distribution from qualified pension plan as result of his post-employment
termination default on plan loans in year in which he was still under age 55: no
Code Sec. 72(t) exception applied since distribution was one-time distribution
that didn't arise on death or disability, wasn't made under qualified domestic
relations order or on account of levy under Code Sec. 6331 , wasn't in respect
to call to active duty, didn't represent ESOP distribution, wasn't part of
substantially equal periodic payments, and didn't go to medical expenses or
qualify as payment after separation from service for individuals age 55 or over.
(Kwame Owusu v. Commissioner, (2010) TC Memo 2010-186 , 2010 RIA TC Memo
Penalty (and Interest)
Abatements - Amended tax returns
In emailed Chief Counsel Advice (CCA),
IRS has concluded that: a) the Code's seeming requirement that only
unpaid tax liabilities can be abated is actually merely permissive;
and b) the taxpayer's late-filed amended return should be treated as
a claim for overpaid penalties and interest.
Code Sec. 6404(a)
provides: “IRS is authorized to abate the unpaid portion of the
assessment of any tax or any liability in respect thereof, which—(1)
is excessive in amount, or (2) is assessed after the expiration of
the period of limitation properly applicable thereto, or (3) is
erroneously or illegally assessed.”
Code Sec. 6511 (a),
a claim for credit or refund of an overpayment must be filed within
three years from the time the return was filed or two years from the
time the tax was paid, whichever period expires later.
the case at hand, the taxpayer
filed an original return with respect to which interest and
penalties were calculated. All of the taxes that taxpayer paid with
respect to that return were paid on or before the date the return
was filed. The amended return was time-barred , but the IRS
agreed that it reflected the correct tax liability. The amended
return showed that there was due a refund of tax. That being
the case, the penalties and interest that had been assessed were
excessive as they were based on a liability greater than was
actually due per the original return.
Taxpayer was in the process of paying
off his interest and penalty liability on a monthly basis.
that the excess interest and penalties can be abated. In this
Advice, Counsel noted that, while
Code Sec. 6404(a)
specifies “unpaid” assessments, IRS's view is that
Code Sec. 6404(a)
is permissive and that IRS is not prohibited from abating the paid
portion of assessments. IRS
says that amended return should be treated as refund claim with
respect to interest and penalties. IRS also said that,
although the amended return was time-barred as a claim for refund of
the excess taxes paid, that return should be treated as a claim for
refund for the penalties and interest paid in the two years prior to
the date the amended return was filed, to the extent those amounts
exceeded what the taxpayer actually owed.
Reasonable Cause Case
Decided Against Taxpayer
TN 8/2/2019) 124 AFTR 2d ¶2019-5118
A married couple’s late filing penalty refund claim was dismissed because the
couple’s reliance on a tax professional to e-file an extension to file their
2014 return was not reasonable cause to abate the penalty when the preparer's
negligence resulted in the extension not being properly filed.
Here are the background facts for this case. Taxpayers, Kristen Intress
and Patrick Steffen (married and who filed a joint return), employed a
professional tax preparer to prepare and file an extension to file their 2014
income tax return. Their tax preparer prepared an electronic Form 4868,
Application for Automatic Extension of Time to File U.S. Individual Income Tax
Return, and queued up the form through her e-file software. However, the
preparer failed to hit send and, therefore, the IRS did not receive the couple’s
2014 Form 4868 on or before the due date for the extension, which was April 15,
The IRS imposed and collected a late filing penalty under Code Sec. 6651(a) from
the couple because they failed to file a valid extension for their 2014 tax
return and filed that return late. The couple argued that their reliance
on a third-party tax preparer to timely file their extension was reasonable
cause under Code Sec. 6651 and that
Boyle did not apply to e-filed tax
returns because taxpayers have no control over the e-filing process.
The couple also argued that they were entitled to a first-time abatement relief
from the late filing penalty under the IRS's First Time Abatement program.
Under Code Sec. 6651(a), the IRS can impose and collect a penalty from an
individual who fails to timely file an income tax return. The penalty is 5% of
the amount of tax required to be shown on the return if the failure is 1 month
or less, with an additional 5% for each additional month, or fraction thereof,
during which such failure continues, not exceeding 25% in the aggregate. The IRS
will abate the penalty if the taxpayer’s failure to timely file is due to
reasonable cause and not due to willful neglect. (Code Sec. 6651(a))
The Supreme Court has held that a taxpayer's reliance on a professional third
party for tax filing is not reasonable cause for abatement of late penalties
should the third party fail to timely file. Reasonable cause is defined as being
"unable to file the return within the prescribed time" notwithstanding the
taxpayer's "exercise of ordinary business care and prudence". (Boyle, (S Ct.
1985) 55 AFTR 2d 85-1535) Thus, under
Boyle , the
taxpayer has the duty to timely file taxes, and reliance on an agent to fulfill
that duty is unjustified when the agent does nothing the taxpayer could not do
There is a limited exception to
Boyle for taxpayers who are disabled
and must rely on an agent to prepare and transmit their returns to the IRS.
(Erickson, (Bank DC MN 1994) 74 AFTR 2d 94-6588)
Rev Proc 2011-25, 2011-17 IRB 725, provides that a professional tax preparer is
not required to e-file an individual income tax return if the preparer obtains a
hand-signed statement from the taxpayer stating that the taxpayer chooses to
file a paper return and the taxpayer, not the preparer, files the paper return
with the IRS.
A taxpayer may qualify for administrative relief from a late filed return
penalty under the IRS's First Time Penalty Abatement program when the taxpayer:
Didn’t previously have to file a return or had no penalties for the 3 tax
years prior to the penalty tax year;
Filed all currently required returns or requested an extension of time to
Has paid or arranged to pay any tax due. (Internal Revenue Manual (IRM) at
The IRS argued that the couple’s reliance on a tax professional was not
reasonable cause for not timely filing their extension under
The district court noted that the couple’s argument that
Boyle did not
apply to e-filed tax returns was a novel legal question not previously addressed
by the federal courts. However, the district court determined that, in this
The district court rejected the couple’s argument that their reliance on a tax
professional to file their extension was reasonable cause to abate the late
filing penalty. The district court noted that taxpayers are not obligated to use
a tax professional to e-file an extension of time to file or a return. In fact,
individuals are not required to e-file their own returns.
The obligation to e-file a return arises only if the taxpayer uses a
professional tax return preparer who is required by the IRS to e-file returns.
However, even then taxpayers can opt out of e-filing using the procedure in Rev
Proc 2011-25. Thus, the couple had the option to prepare their own extension and
mail it to the IRS because they were not required to use a tax professional to
prepare or to e-file their extension. Since the decision to use a tax preparer
was within the couple’s control, and there was no evidence that the couple was
not capable of preparing Form 4868 due to a disability,
to their reasonable cause argument. But, the couple failed to show they
exercised ordinary business care and prudence when filing their extension.
The district court also concluded that the "ordinary business care" standard in
would continue to be the standard for reasonable cause, at least until e-filing
becomes universally mandatory or paper filing so cumbersome that ordinary
taxpayers could not file paper returns. But, the district court noted that the
"ordinary business care" reasonable cause standard in
need to be reassessed given the trend towards universal e-filing and the
difficulty that could pose to
application going forward.
The district court commented that the couple's argument that the burden of
timely e-filing should be on the tax professional, not on the taxpayer, would be
much more plausible if the IRS required all returns to be e-filed. At that
point, the average taxpayer would be similarly situated to a taxpayer with
disabilities in that reliance on an agent or intermediary for transmission of
the electronic return would be required.
The district court also rejected the couple's argument that they were entitled
to a first time penalty relief under the Internal Revenue Manual. As the IRS
pointed out, the IRM is a policy guide to a governmental agency and does not
entitle a taxpayer to judicial relief. (Laidlaw, TC Memo 2017-167)
* * * * * * * * *