ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – ABATING LATE FILING PENALTIES – WHAT IS REASONABLE CAUSE? – PART 2
By Robert S. Schriebman
This is Part 2 of a 2-Part series that will discuss the recent case of Peng v. US. This case was decided in the US Court of Federal Claims in October 2018. The case is instructive because it demonstrates what NOT to do when seeking to convince the IRS to remove or abate late filing penalties. See Shih-Fu Peng and Roisin Heneghan v. U.S. Court of Federal Claims, 16-1263 T, October 24, 2018.
In Part 1, we discussed in detail the facts in Peng Case. Mr. Peng did not file his 2012 joint individual income tax return, Form 1040, until July 17, 2014. The IRS assessed late filing penalties against Peng to the tune of $17,000. Peng paid the penalty, filed a claim for refund and when it was denied, took the IRS to Court arguing that he had reasonable cause to have the penalties, and interest on the penalties abated.
What were Peng’s ground for reasonable cause to abate the penalties and obtain a refund? Mr. Peng sought to excuse his delinquency for the following reasons:
- Mr. Peng’s father died in July 2012.
- Mrs. Peng (Heneghan) gave birth to a child in January 2013.
- Mr. Peng’s grandmother died in October 2013.
- Mr. Peng claimed that his accountant was unresponsive to his inquires.
The Court ruled that none of Mr. Peng’s reasons constituted valid grounds for a refund of penalties and interest thereon. In ruling against Peng, the Court cited the US Supreme Court decision in United States v. Boyle 469 U.S. 241, 245 (1985). The Boyle case is instructive because it defines “reasonable cause.”
In this Part 2, we will take a closer look at the Boyle case as well as two other court cases interpreting Boyle. We will also look at the provisions of the IRS Manual that sets forth the primary criteria for reasonable cause.
The Boyle Case
A taxpayer seeking to have the IRS abate or remove late filing and late payment penalties bears a tough burden of demonstrating, by a preponderance of the evidence, both reasonable cause and a lack of willful neglect. Most of the time the establishment of reasonable cause by itself is enough; absence of willful neglect routinely falls by the wayside. In reality, the standard of “preponderance of the evidence” really means proof beyond a reasonable doubt. An IRS agent reviewing the abatement request basically has nowhere to turn but to grant the request. That’s reality.
The Supreme Court’s Boyle case stated the following: “[t]o escape the penalty, the taxpayer bears the heavy burden of proving both (1) that the failure did not result from ‘willful neglect,’ and (2) that the failure was ‘due to reasonable cause.” Boyle, 469 U.S. at 245.
There are no provisions in the Code that define “reasonable cause” or “willful neglect.” The Court in Boyle defines willful neglect as meaning a conscious, intentional failure or reckless indifference. Reasonable cause, according to Boyle, calls for the taxpayer to demonstrate that he/she exercised ‘ordinary business care and prudence’ but, nevertheless, was unable to file the tax return within the prescribed time. The Boyle guideline comes down to the taxpayer showing that he/she used the same care that the average business person would use in running a successful business; a super-human effort is not required.
Avoid putting the blame for your failure on your tax preparer, CPA or Attorney. Nothing turns the IRS off more than this. It seems that everybody blames their professional advisor – no one seems to want to take personal responsibility.
Lower Court Cases
The Court in Peng cited two lower court cases to drive home the standard set by the Boyle case. In Stine v. US, 106 Fed. Cl. 586 (2012), the court recognized that personal hardship may constitute a reasonable cause for failure to timely file a tax return under some circumstances. For example, physical illness and debilitation can constitute reasonable cause. The severity and timing of the illness may make it virtually impossible to timely file a tax return – the court cited the example of emergency hospitalization, or other incapacity that occurs around tax time. The court distinguished between an objective physical ailment as opposed to a mental or emotional problem. I interpreted this to mean ‘if we can’t see it or feel it, it may not exist.’ I am not making light of mental or emotional problems, but I can tell you that several years ago I was unsuccessful in abating late filing and late payment penalties due to alcoholism. To this day I believe that if my client was in a body cast, I would have been successful.
Having said the above, mental and emotional problems may be considered as reasonable cause but the taxpayer must prove evidence of incapacity caused by mental or emotional circumstances such as, psychiatric care. In re Carlson, 126 F.3d 915, 923 (7th Cir. 1997).
A Brief Look at the IRS Manual
The IRS Manual is the bible for how the IRS does business. Chapter 20 discusses penalties and penalty abatements due to reasonable cause. The most common grounds are as follows:
- Death, serious illness or unavoidable absence.
- Fire, casualty, natural disaster or other disturbance (the recent fires in California)
- Inability to obtain necessary records,
- Error or forgetfulness
- Reliance by taxpayer on the advice of a c competent tax advisor.
Most people seek penalty abatement relief using the first two criteria.
The US Supreme Court standard set by the Boyle case tells us that the real definition of reasonable cause is the exercise of ordinary business care and prudence. The definition does not say extraordinary or superhuman efforts. Whenever possible document your request for penalty abatement with paper! Furnish a medical report, a police report, photographs, or an insurance adjuster’s report proving that the events were beyond your control. In my practice I have found that if you do not document your abatement requests with supporting paperwork, you are going to have an uphill battle that will most likely result in failure.
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 40 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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