There are several ways to defend against IRS penalties. Sometimes the asserted defense will depend on the type of penalty at issue, but the most common defense is "reasonable cause." The primary authority for this defense is found in I.R.C. § 6664(c), which provides that, "[n]o penalty shall be imposed . . . if it is shown that there was a reasonable cause . . . and that the taxpayer acted in good faith." See also Treas. Reg. § 1.6664-4(a).
Sounds simple enough, but "reasonable cause" is a legal term of art, and the tax law defines it in abstract terms. The Treasury Regulations tell us that "reasonable cause" entails the exercise of ordinary business care and prudence to comply with the tax law. Treas. Reg. § 301.6651-1. But that begs the question: what constitutes ordinary business care and prudence? That depends.
One thing that I have learned as a lawyer is that people hate it when lawyers answer questions with, "it depends." But before you kill the messenger, let me explain. The standard of reasonable cause "depends" because the determination is made on a case-by-case basis taking into account all pertinent facts and circumstances. See Treas. Reg. § 1.6664-4(b). In this respect, the most important factor is the extent of the taxpayer's effort to properly comply with tax obligations. Id. In other words, what we need to establish to prevail in petitioning the IRS to waive civil tax penalties is that the taxpayer's non-compliance was not only unintentional but that the taxpayer in fact tried to comply with the relevant tax obligation.
Is the IRS trying to assess penalties against you? Contact me today! I may be able to obtain an abatement of the penalties, and consultation is always free!