Do I Have Reasonable Cause for Penalty Abatement?

It's no fun when the IRS adds penalties and interest to your balance due. In fact, it can feel like they are just trying to add insult to injury. What the IRS is actually trying to do is encourage voluntary compliance with American tax laws. Even the IRS knows that certain events are out of your control and may cause you to file a return late or make a payment late. If this is the case, you may qualify for penalty abatement due to reasonable cause.
Reasonable Cause?
By claiming reasonable cause for noncompliant behavior (not filing, not paying, etc), you are saying that there was no willful neglect on your part, i.e. that you didn't do it on purpose. Reasonable cause is the set of events or circumstances, specific to each individual's situation, which acts to explain the noncompliant behavior of an individual. A good layman's definition of Reasonable Cause is that there were circumstances outside of your control, or that made it virtually impossible to, do what you were supposed to do (file, pay, etc.).

The IRS recognizes the following sixteen arguments, or possible reasons, for reasonable cause:

1. Death:
   • If there was a death in your immediate family (such as spouse, sibling, parent, grandparent, or child) that prevented you from complying with the IRS, you may qualify for penalty abatement. You should be prepared to explain to the IRS who died, the date the death occurred, and exactly how the death prevented you from meeting your obligations to the IRS.
     You will need the following to support your claim:
     • Copy of death certificate
2. Serious Illness:
   • If either you or an individual in your immediate family had a serious illness which prevented you from complying with the IRS, you may qualify for penalty abatement. A serious illness is usually one which requires some type of continual care, either at a hospital/clinic or personal care at your home.
     You should have the following documentation to support your claim:
     • Doctor's statement detailing and documenting your illness
     • Medical bills
3. Unavoidable Absence:
   • An unavoidable absence means that you were not at your residence and could not comply with the IRS, at no fault of your own. Valid examples of this are incarceration, detainment in a foreign country, or deployment to a Combat Zone.
     You should have the following documentation to support your claim:
     • Proof of incarceration
     • Copy of passport showing dates you left and entered the country
     • Documentary proof that you were detained
     • Proof that you were in a Combat Zone
4. Bankruptcy:
   • If you were in bankruptcy when a failure to pay penalty was assessed, you can request penalty abatement for reasonable cause. Bankruptcy will not be considered as reasonable cause for a failure to file penalty.
     You should have the following documentation to support your claim:
     • Bankruptcy filing documents
5. Inability to Pay Due to Extreme Financial Hardship:
   • In order to qualify for reasonable cause due to an inability to pay because of extreme financial hardship, you must show the IRS that you would have suffered a substantial financial loss if you had paid the tax by the due date. In most cases, this financial hardship is due to an unexpected event. An inability to pay due to extreme financial hardship will not be considered as reasonable cause for a failure to file penalty.
     You should have the following documentation to support your claim:
     • Bank statements showing the amount in your accounts when payment was due
     • Statements/bills showing the unexpected cost that was incurred
6. IRS Error:
   • If the IRS made an error in computing or assessing tax on your account or crediting your account with a payment, you can request penalty abatement due to reasonable cause. You will have to show the IRS that you did comply with the law from the beginning and the IRS did not recognize that fact.
     You should have the following documentation to support your claim:
     • IRS Notice or Letter showing the error
     • IRS Publication showing the error
     • Specific citation of rule or correct application from a law source
7. Incorrect Written Advice from the IRS:
   • If an IRS employee issued your erroneous advice in writing, the IRS will abate the penalty that resulted from you following the advice.
     You should have the following documentation to support your claim:
     • Copy of your request for advice
     • Copy of IRS response to your request
8. Incorrect Verbal Advice from the IRS:
   • If an IRS employee gives you erroneous advice either over the phone or in person, the IRS may abate the penalty that resulted from you following the advice. This type of reasonable cause is not as effective as having incorrect written advice because it is essentially your word against the IRS.
     You should have the following documentation to support your claim:
     • Notation of your question to the IRS
     • Documentation regarding the advice provided by the IRS
9. Postal Service Error
   • If the United States Postal Service lost your mail or made an error concerning the delivery of your tax return or tax payment (delivering your mail to another taxing agency for example), you can request that the associated penalty be removed due to reasonable cause.
     You should have the following documentation to support your claim:
     • Statement from USPS concerning the error
10. Tax Professional Error:
    • Reliance on a tax professional provides reasonable cause only when it is associated with a technical or complicated tax issue, such as an accuracy related penalty. Failing to file or pay your taxes on time cannot be excused because of advice from a tax professional.
      You should have the following documentation to support your claim:
      • Copy of incorrect advice
      • Copy of document showing the error made
11. Lack of Forms:
    • If you did not have the correct forms or schedules needed to complete your return, the IRS may abate your penalties due to reasonable cause. However, with the accessibility to forms through the internet and through most public libraries, this is not one of the stronger arguments for reasonable cause. The IRS will also take into account whether or not you filed an extension to receive extra time to get the forms.
      You should have the following documentation to support your claim:
      • Copy of extension filed
12. Inability to Obtain Forms:
    • An inability to obtain forms indicates that you tried to get the forms needed to complete your tax return, but could not, for reasons outside of your control. Most often, this includes not receiving earning statements from an employer.
      You should have the following documentation to support your claim:
      • Copy of extension filed
      • Copies of letters written and/or received in effort to obtain documentation
13. Fire:
    • A fire that destroyed your records may be reasonable cause for failing to comply with the IRS. The IRS will consider the timing of the fire in relation to when your return or payment was due and whether or not you had any other copies of your records to fulfill your tax obligation.
      You should have the following documentation to support your claim:
      • Copy of insurance claim
      • Report from fire department
14. Theft:
    • If your records were stolen and you consequently could not comply with the IRS, you have reasonable cause for failing to comply with the IRS. If you misplaced or lost your documents, however, this is not the same as having your records stolen - misplacement is under your control; having your records stolen is not.
      You should have the following documentation to support your claim:
      • Copy of insurance claim
      • Copy of police report
15. Disaster Area:
    • If you are located in an Official Disaster Area, the IRS usually issues special instructions for requesting penalty abatement.
      You should have the following documentation to support your claim:
      • Copy of insurance claim
16. Unknown Filing Requirement:
    • If you did not know that there was a filing or payment requirement (and could not reasonably be expected to know), you may have reasonable cause for failing to comply with the IRS. You should be able to show the IRS that you did make a reasonable effort to comply with any requirements you were aware of.
      You should have the following documentation to support your claim:
      • Documentation showing when the new requirement went into effect
17. Tax Law Change:
    • A recent tax law change of which you were unaware (and could not reasonably be expected to know) can provide basis for reasonable cause.
      You should have the following documentation to support your claim:
      • Citation of tax law