Ordinary Business Care and Prudence Standard is a requirement that is present, explicitly or implicitly, in all reasonable cause defenses. In this article, I would like to explain what Ordinary Business Care and Prudence Standard means and what are the main factors for analyzing whether a taxpayer met the burden of proof required under the Ordinary Business Care and Prudence Standard.
Ordinary Business Care and Prudence Standard: General Requirements
The ordinary business care and prudence standard is an objective standard. There is no precise definition of this standard, because its application is fact-dependent. Nevertheless, the standard is generally satisfied as long as the taxpayer acted prudently, reasonably and in good faith (taking that degree of care that a reasonably prudent person would exercise) and still could not comply with the relevant tax requirement. IRM 20.1.1.3.2.2 (02-22-2008) adds that “ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur”.
Ordinary Business Care and Prudence Standard: Common Factors
While the determination under the ordinary business care and prudence standard is highly fact-dependent, there are certain common factors that the IRS will take into account. IRM 20.1.1.3.2.2 (02-22-2008) specifically lists four factors that must be reviewed by the IRS, but states that all available information should be considered. Let’s explore these common factors:
1. Compliance History
The main issue here is to see if this is the first failure to comply with US tax laws by the taxpayer or whether he already violated in the past the tax law provision in question IRM 20.1.1.3.2.2 (02-22-2008) states that “the same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care”. The IRM urges the IRS agents to check at least three preceding tax years for payment patterns and the taxpayer’s overall compliance history.
If the violation was the first time a taxpayer exhibited noncompliant behavior, this will be a positive factor that will be considered with other reasons the taxpayer provided for reasonable cause. While a first-time noncompliance does not by itself establish reasonable cause, taxpayers who violated the same provision more than once will find it more difficult to establish that their behavior satisfied the ordinary business care and prudence standard.
2. Length of Time
At issue here is the time between the event cited as the reason for the initial tax noncompliance and subsequent compliance actions. IRM 20.1.1.3.2.2 (02-22-2008) requires the IRS agents to consider: “(1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer’s control, and (3) when the taxpayer complied with the law.”
Obviously, if the taxpayer did not discover his noncompliance until one year later and immediately tried to remedy the situation, it will add significant force to his argument that his behavior satisfied the ordinary business care and prudence standard. On the other hand, an unexplained delay between the time the taxpayer discovered his noncompliance and the time he attempted to remedy it will have a negative impact on the overall taxpayer’s argument.
Another highly important factor that plays a crucial role in offshore voluntary disclosures is whether, after discovering his prior noncompliance, the taxpayer voluntarily complied prior to being contacted by the IRS. In a voluntary disclosure context, if the IRS initiates an examination and contacts the taxpayer first, his voluntary disclosure options may be entirely foreclosed. On the other hand, the fact that a taxpayer voluntarily contacted the IRS with his amended tax return that corrected his prior tax noncompliance may play a highly positive role in convincing the IRS that the taxpayer’s prior behavior was consistent with the ordinary business care and prudence standard.
Hence, it is highly important for the taxpayer to explain what happened during the time between his prior noncompliance and his current effort to remedy the situation.
3. Circumstances Beyond the Taxpayer’s Control
The crucial issue here is whether the taxpayer could have anticipated the event that caused the noncompliance. If he could have done it, then his case might be materially weakened. On the other hand, if the taxpayer could not have anticipated the event, then, it might play a very important role in convincing the IRS that his behavior satisfied the ordinary business care and prudence standard.
A lot of sub-factors play a very important role here: the taxpayer’s education, his tax advisors, whether he has been previously subjected to the tax at issue, whether he has filed the tax forms in question before, whether there were any changes to the tax forms or tax law (which the taxpayer could not reasonably be expected to know), and so on. The level of complexity of the issue in question is also an important additional sub-factor.
The “circumstances beyond control” factor is necessarily tied to the “length of time” factor described above, because a taxpayer’s obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence standard generally requires that the taxpayer continue to meet the requirements, even if is he late.
4. Taxpayer’s Reason for Prior Noncompliance
The taxpayer must provide and the IRS agent must consider an actual reason for the prior tax noncompliance whatever it may be and this reason must address the specific penalty imposed. It is the combination of this taxpayer’s reason together with other factors, including the common factors described above, that will form the basis for the taxpayer’s argument that his behavior satisfied the ordinary business care and prudence standard.
Contact Sherayzen Law Office to Contest IRS Penalties based on Reasonable Cause and Ordinary Business Care and Prudence Standard
Since 2005, Sherayzen Law Office has saved its clients millions of dollars in potential IRS penalties. If you wish to challenge the imposition of IRS penalties on your prior US domestic and/or international tax noncompliance, contact Sherayzen Law Office for professional help. We will thoroughly review the facts of your case, determine the available defense strategies to reduce or eliminate IRS penalties (including the determination of whether your case satisfied the ordinary business care and prudence standard), implement these strategies and defend your case against the IRS.
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