Fires, natural disasters or civil unrest. Death, serious illness, or the inevitable absence of the taxpayer or their immediate family System problems that delayed electronic filing or timely payment. Reasonable cause is based on all the facts and circumstances of your situation. The IRS will consider any reason that shows that you used all the usual business care and prudence to meet your federal tax obligations, but were nonetheless unable to do so.
The existence of the elements constituting reasonable cause, deliberate negligence or good faith is based on all facts and circumstances. Reasonable cause is established when the taxpayer exercised ordinary commercial care and prudence. Ordinary commercial care and prudence is defined as taking the degree of care that a reasonably prudent person would exercise. In essence, a taxpayer can have reasonable cause when the evidence of their conduct justifies the non-assertion or reduction of the fine (“Reasonable Cause”).
Cases are judged individually; judgments are based on the evidence, facts and circumstances presented. Trusting an expert or something the IRS tells you is indicative of the ordinary care and prudence that the IRS seeks in granting a reduction in the tax penalty. The same applies to penalties for an exaggeration of the gross valuation for claiming charitable contribution deductions for property. The IRS applies a case-by-case test of facts and circumstances to determine if a taxpayer complies with the exception for reasonable cause.
For the accuracy of tax returns that are commonly seen in CP2000 notices or audits, the most important factor is the taxpayer's reasonable attempts to report the correct tax (i). Most taxpayers are not competent to discern errors in the substantive advice of a lawyer or accountant; therefore, requiring the taxpayer that challenging the lawyer to seek a second opinion would defeat the purpose of seeking advice from an alleged expert in the first place. Arguing that you thought tax returns were due on May 15, not April 15, even if a tax professional told you that, probably won't save you from penalties. Regardless of the sanctions to which they apply, good facts and justification will overcome most IRS objections.
According to In re Sanford, both the IRS and taxpayers must pause because if the agreement fails and litigation occurs, then it would be an “all or nothing” proposal. This is a double-edged sword, but I have personally accepted several successful tax penalty reductions because the taxpayer was unable to obtain the necessary records to meet their tax obligations. For example, a specific question that the IRS could use focuses on determining what attempts the taxpayer made to comply once all the facts and circumstances changed. In the Tax Court case, the IRS denied a deduction per dependent and imposed an accuracy-related sanction on a noncustodial parent because it failed to provide the necessary exemption from his ex-wife.
The IRS even states in the IRM that relying on another person to perform your duties or oversight on your own behalf is generally not sufficient to establish reasonable cause. However, as stated in the Internal Revenue Manual, these are the circumstances that I have discovered in my experience and that the IRS is most likely to accept. For example, section 6676 of the Code imposes a penalty for an excessive request for a refund or credit, but can be exempted from the penalty if reasonable cause is demonstrated.
