In fact, the Code is chock full of penalty provisions. 6721 and (4) a tax return preparer's understatement of a taxpayer's liability under Sec. 6676 (3) for failure to file Form 1099 or other information reporting returns under Sec. 6651, (2) for making an erroneous claim for refund or tax credit, under Sec. Reasonable-cause exceptions also apply to other penalties the IRS can impose, including the penalties: (1) for failure to file a tax return, and failure to pay, under Sec. That makes taxpayers' ability to sidestep them big too, even if they end up having to pay all the tax and the interest.īut wait, there's more. Fraud penalties are not asserted frequently, but it is not an exaggeration to say that they can be big. So, if a flaky tax deduction amounts to $10,000 in tax, add another $7,500 on top if the IRS says it was fraud. How much is the civil fraud penalty? A whopping 75%. The reasonable-cause exception also applies to penalties for civil fraud under Sec. 6662 accuracy-related penalties, which are usually 20% of the amount at stake. 6664(c) reasonable-cause exception applies to the Sec. This can lead to inconsistent results, and ones that are subjective. The IRS applies a facts-and-circumstances test on a case-by-case basis to determine whether a taxpayer meets the reasonable-cause and good-faith exception. And remember, all tax returns are signed under penalties of perjury, so keep that in mind too. Taxpayers all must exercise ordinary business care and prudence in reporting their proper tax liability. Put differently, taxpayers bear the burden of substantiating their reasonable cause. Who wins in a tax penalty stalemate? This one should not be a surprise. Isn't that proving a negative? Yes, it is. In addition, on top of reasonable cause, certain penalty defenses involve other concepts, such as an absence of willful neglect. (This article focuses on reasonable cause and does not discuss the IRS's first-time abatement program to have penalties abated.)Īmong other things, how the IRS evaluates a defense depends on which penalty has been assessed. Even if a taxpayer thinks he or she complied with them as a matter of common sense, the IRS may not agree. Those seem like pretty friendly, easy-to-understand words, but they are actually terms of art. While the IRS may think this is necessary in order to administer the tax laws, it has generated hundreds of millions of dollars in taxes that were not due.Dear IRS, no penalties please! Taxpayers claim that penalties are not warranted for many reasons, but what works? One of the biggest yet most misunderstood is the defense that a tax position was based on reasonable cause and the taxpayer acted in good faith. So, there are a lot of things you don’t want to do that may shift the burden of production back onto you if mishandled.įolks, the reality is the IRS has issued millions of proposed tax assessments to innocent taxpayers who did not receive the claimed income based solely upon a Form 1099. There are statutes that govern the situation and there are a lot of tax court cases that do as well. Today, the IRS has the burden of producing evidence that you received this income and that it was taxable.įurther, if the IRS insists upon assessing that tax against you administratively or in court beyond a reasonable period of time, it is quite possible to collect attorney and accounting fees for the time spent doing the job the IRS is supposed to do.īut be careful how you handle this. Instead, the IRS today - because of a court case and a statute - has the burden of producing evidence that you actually received this unreported income. Let’s start out with the fact that in unreported income cases the IRS is no longer presumed to be correct. So, there are a couple of ways of handling this. Let me assure you that the IRS computer is even less sympathetic. IRS agents are notorious for not being sympathetic. So, exactly how do you prove you did not receive that income? Proving the truth of something is hard enough, but proving a negative - that something didn’t actually happen - is really hard to do.Īnd worse, keep in mind that all of this is initially being handled by the IRS computer. Invariably, these clients claim they did not receive that income or that amount of income and that this proposed assessment is unfair. Recently, I have had a number of new clients come in complaining that the IRS had set up additional tax liability against them for “unreported income” claimed on an erroneous Form 1099 they received.
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