Ask The California Employment Tax And Payroll Tax Attorney – Abatement Of Llc Estimated Tax Penalty – Agri-turf Distributing Case
By Robert S. Schriebman
2023
Introduction
Most penalties asserted against corporations, LLCs and individuals may be abated for “reasonable cause.” Reasonable cause for noncompliance is the main reason for the IRS, FTB and EDD to consider abating penalties. Reasonable cause is not specifically defined. There is virtually no statutory language and hints in IRS regulations making reference to the exercise of ordinary business care and prudence. Back in 1985 the US Supreme Court decided the case of Boyle v. US arising out of the 7th Circuit (Boyle v. US, 469 US 241(1985)). The Boyle case involved a taxpayer’s improper reliance upon the advice of his accountant.
From Boyle and the cases that have been decided over the years, reasonable cause has come to mean conducting one’s affairs in an ordinary prudent manner as an average businessperson would conduct his/her business operations. One does not need to be a super-comic book character able to leap tall buildings in a single bound.
There are many penalties in both the state and federal taxation codes. Most penalties such as late filing or late payment penalties may be abated using the standards of reasonable cause. The exceptions to the reasonable cause criteria are estimated tax penalties assessed against individuals and corporations (LLCs).
In early March 2023, the Office of Tax Appeals (OTA) issued its decision In the Matter of the Appeal of Agri-Turf Distributing, LLC, OTA Case No. 220510357.
The Agri-Turf Distributing, LLC Case
Agri timely filed its LLC Return of Income (Form 568) for the 2020 tax year and reported $800 of annual tax and an LLC fee of $11,790. Agri timely paid the $800 annual tax on July 15, 2020, but untimely paid its estimated LLC fee of $11,790 on August 15, 2020. The FTB imposed a 10% penalty of $1,179 for the late payment by the FTB. Agri filed a request for abatement of the penalty. Its request was denied. The OTA affirmed the denial.
If the estimated LLC fee is not paid on time, the FTB imposes a 10% penalty per R&TC §17942(d). This statute does not provide for a reasonable cause exception to the imposition of the penalty. The only defense available is a safe harbor provision which provides that the penalty will not be imposed if the estimated LLC fee is equal to or exceeds the LLC fee due for the prior tax year.
Agri contended that it had reasonable cause because it relied on a CPA to keep track of its payments to the FTB, but the CPA dropped the ball. The OTA told Agri that it made no difference what the CPA did or not do because there is no reasonable cause exception for this penalty. The safe harbor rules also do not apply because Agri’s payment was late. Safe harbor only applies when thepayment is timely.
Estimated Tax Penalty Abatements for Corporations and LLCs
The first thing to keep in mind is that in order for any relief rules to apply, the estimated tax payment must be timely. There are no reasonable cause exceptions. There is only a safe harbor rule that applies as follows: payment of 100% of the tax shown on the return for the preceding year.
Estimated Tax Penalty Abatements for Individuals
In order to seek safe harbor for individuals, the rules of thumb are:
The lesser of:
- 90% of the tax shown on the return for the current year, or
- 100% of the tax shown on the return for the preceding year.
IRC § 6654(e)(3)(A) states that the estimated tax penalty may be waived if the failure to make the estimated tax payment is due to casualty, disaster, or other unusual circumstance. The criteria are primarily based upon equity and good conscience. The standard of reasonable cause does not apply.
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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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