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Tax Newsletter

Reasonable Cause for Failure to File a Tax Return or to Pay a Tax

When a taxpayer fails to file a tax return or to pay a tax that is due, the IRS will impose a penalty. However, a taxpayer will be excused from paying the penalty for failure to file or pay if he or she shows that there was reasonable cause for such failure in a written statement made under penalty of perjury. Reliance on an attorney, accountant or other expert constitutes reasonable cause, and can excuse a taxpayer from having to pay the penalty.

Penalties for Failure to File a Tax Return and Failure to Pay a Tax

The penalty for failing to file a tax return is a 5% addition to the tax if the failure does not exceed one month. There will be an additional 5% penalty for each month thereafter for as long as the failure continues, up to 25% of the unpaid tax. If filing more than 60 days late, there is a minimum penalty of the lesser of $135 or the total amount of the unpaid tax.

The penalty for failing to pay a tax on or before the required date is 0.5% of the amount of the tax due if the failure does not exceed one month. There will be an additional 0.5% penalty for each month thereafter for as long as the failure continues, up to 25% of the unpaid tax.

Reliance on an Attorney or Other Expert as Reasonable Cause

An inexperienced taxpayer’s reliance on an attorney, accountant or other expert constitutes reasonable cause and can excuse the taxpayer’s failure to file or pay. For example, a husband and wife who employ a reputable accountant to prepare their joint income tax returns, giving the accountant all he needs to prepare correct returns, will not be liable for fraud penalties from incorrect deductions made by the accountant.

In order to show reasonable cause, a taxpayer must prove that he or she exercised ordinary business care and prudence and was nevertheless unable to file the tax return or pay the tax in a timely manner. Some factors used to determine whether the taxpayer exercised ordinary business care and prudence are:

  • The taxpayer’s financial situation, including the amount of the taxpayer’s expenditures in relation to his or her income
  • Whether the taxpayer made reasonable efforts to conserve assets to satisfy tax liability, but was nevertheless unable to pay
  • The nature of the tax the taxpayer failed to pay
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