This article is a continuation of a series of articles on the Reasonable Cause Exception as a defense against various IRS penalties. Today, we will be exploring whether a mistake made by a taxpayer satisfies the ordinary business care and prudence standard and can be considered a reasonable cause.
Mistake Alone Does Not Constitute Reasonable Cause
Generally, the IRS takes the view that a mistake alone is not sufficient to establish a reasonable cause defense to an imposition of an IRS penalty, because it is not considered to be a conduct that would qualify as ordinary business care and prudence – i.e. generally, situations when a 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. We remind the readers that the ordinary business care and prudence standard is at the heart of the Reasonable Cause Exception.
Mistake Can Help Establish Reasonable Cause
While a taxpayer’s mistake alone is insufficient to establish a reasonable cause, the Internal Revenue Manual (IRM) specifically foresees a possibility that a mistake can help assert a reasonable cause defense. IRM 22.214.171.124.2.2.4 (12-11-2009) specifically states that the Reasonable Cause Exception may be established if mistake with “additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply within the prescribed time”.
In other words, if mistake, in combination with other facts and circumstances, established that a taxpayer’s behavior was consistent with the ordinary business care and prudence standard, the IRS may agree that the tax noncompliance was caused by a reasonable cause.
IRS Factors Supporting Mistake as a Reasonable Cause
IRM 126.96.36.199.2.2.4 (12-11-2009) does not limit the number of factors that will be considered by the IRS in deciding whether there are sufficient facts and circumstances supporting mistake as a reasonable cause. However, it provides five specific factors to which the IRS will pay special attention:
1. When and how the taxpayer became aware of the mistake;
2. The extent to which the taxpayer corrected the error;
3. The relationship between the taxpayer and the subordinate (if the taxpayer delegated the duty);
4. If the taxpayer took timely steps to correct the failure after it was discovered;
5. The supporting documentation.
Contact Sherayzen Law Office for Professional Legal Help with Establishing a Reasonable Cause Exception in Your Case
If the IRS imposed a penalty for your prior tax noncompliance, you should contact Sherayzen Law Office for the legal help. We will thoroughly review the facts of your case, determine available defense options, including the Reasonable Cause Exception defenses, implement the case strategy with which you feel comfortable, and negotiate the abatement or reduction of your IRS penalties.