We are continuing our series of articles on Reasonable Cause. Today, we will discuss whether a serious illness can establish a reasonable cause for abatement of the IRS penalties. It is important to note that this discussion of serious illness as a reasonable cause is equally applicable to death and unavoidable absence of the taxpayer (in fact, the Internal Revenue Manual (IRM) discusses all three circumstances – death, serious illness and unavoidable absence of taxpayer – at the same time in providing guidance on reasonable cause).
Serious Illness Can Constitute a Reasonable Cause
IRM 22.214.171.124.2.2.1 (11-25-2011) expressly states that serious illness can be used as a Reasonable Cause Exception: “death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family, may establish reasonable cause for filing, paying, or depositing late… .” In this context, “immediate family” means spouse, siblings, parents, grandparents, or children.
In the business context, a reasonable cause may be established if death, serious illness or other unavoidable absence occurred with respect to a taxpayer (or his immediate family) who had the sole authority to execute the return, make the deposit, or pay the tax. The same rule applies to corporations, partnerships, estates, trusts and other legal vehicles for conducting business.
Taxpayer Has the Burden of Proof to Establish that Serious Illness Constitutes Reasonable Cause for His Prior Tax Noncompliance
Stating that a serious illness can constitute a reasonable cause for abatement of the IRS penalties with respect to prior tax noncompliance is not equivalent to stating that serious illness automatically establishes a reasonable cause.
On the contrary, the taxpayer has the burden of proof to establish that serious illness did indeed constitute reasonable cause with respect to his prior tax noncompliance. In other words, serious illness may not be sufficient to establish reasonable cause for various reasons (for example, in cases where it was not actually related to tax noncompliance).
Factors Relevant to Determination of Whether Serious Illness Is Sufficient to Establish Reasonable Cause Exception
IRM 126.96.36.199.2.2.1 (11-25-2011) provides a list of recommended factors to consider in evaluating a taxpayer’s request for abatement of penalties based on serious illness, death or unavoidable absence. I somewhat modified the list to fit in all factors expressly mentioned in the IRM. Here is the non-exclusive list of factors expressly referenced in the IRM:
1. the relationship of the taxpayer to the other parties involved;
2. the dates, duration, and severity of illness (in case of death, the date of death; in case of unavoidable absence, the dates and reasons for absence);
3. how the event prevented tax compliance;
4. how the event impaired other obligations (including business obligations);
5. if tax duties were attended to promptly when the illness passed (or within a reasonable period of time after a death or absence);
6. (in a business setting) in a situation where someone other than responsible person or the taxpayer was responsible for meeting the infringed business tax obligation, and why that person was unable to meet the obligation;
7. (in a business setting) if only one person was authorized to meet the tax obligation, whether such an arrangement was consistent with ordinary business care and prudence.
This is not an all-inclusive list of factors. The IRM foresees the possibility that any other relevant factors may be considered in the analysis of whether a Reasonable Cause Exception was established based on serious illness, death or unavoidable absence.
Contact Sherayzen Law Office for Experienced Help With Establishing A Reasonable Cause Defense, Including Based on Serious Illness
There is always a risk that the IRS may reject a taxpayer’s reasonable cause argument, often simply because the argument was never properly elaborated by the taxpayer. This is why it is important to maximize your chance of success by timely securing professional legal help.
Sherayzen Law Office is a highly experienced tax law firm that has helped its clients around the world to establish various reasonable cause defenses against IRS domestic and international tax penalties. We can help You!