ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – ALCOHOLISM AND DEPRESSION – DO THEY CONSTITUTE REASONABLE CAUSE TO ABATE IRS LATE PENALTIES? YES AND NO!
By Robert S. Schriebman
At the end of August 2022, the US Tax Court issued a decision dealing with the abatement of late filing and late payment penalties due to alcoholism and related depression. I will discuss this case below. The case brought back an unpleasant memory of years ago when the IRS Appeals Division refused to consider cancelling penalties due to these disabilities. I had a client who failed to file tax returns for many years due to chronic alcoholism that periodically confined him to hospitalization. When I attempted to explain my client’s condition to the assigned appeals officer, whose name I will not mention, who over the phone refused to grant me a face-to-face conference. He refused to entertain alcoholism as a serious illness per the criteria stated in the Internal Revenue Manual Chapter 20. (IRM)
Have things changed over the years? Will alcoholism and depression now meet the serious illness criteria for abatement as stated in the IRM?
On August 30, 2022, the US Tax Court issued a decision squarely on point in the Remisovsky case. In this case the taxpayer was an alcoholic who failed to timely file his 2013 joint federal income tax return. He wanted the court to abate the late filing and late payment penalties arguing that his alcoholism and depression constituted reasonable cause for penalty abatement.
The Remisovsky Case
George and Ellen Remisovsky v. Commissioner, TC Memo 2022-89, August 30, 2022.
George was a medical doctor and Ellen held a job as a retail manager. They failed to timely file their 2013 joint federal income tax return. The IRS sent them several notices requesting the return, but when no return was filed, the IRS prepared a substitute return pursuant to IRC § 6020(b). Finally, in May 2016, over two years later, George and Ellen filed their 2013 return. There was no payment with the return causing the IRS to assess late filing and late payment penalties of close to $8,000. The IRS sent George and Ellen a notice to file a Collection Due Process petition (CDP) and they did so. Their case was assigned to a Settlement Officer (SO) who refused their request to abate late penalties due to alcoholism and depression. George and Ellen also requested a “first-time penalty abatement” under IRS internal procedures. However, this relief was not available due to the failure to file a timely return in 2011. The SO offered them an installment payment arrangement which they refused. Instead, they elected to take the IRS to the Tax Court for refusal to abate the late penalties.
Enter the US Tax Court
George told the judge that he was hospitalized for alcoholism and depression in 1990 and had a relapse in 2012. He also produced a letter from a psychiatrist dated July 2019. George was being treated for depression. The letter stated that George “…also has a history of being alcoholic, although he has had periods of sobriety,” and that “his cognitive capacity to comply with his financial obligations and to pay his taxes in timely fashion were severely diminished.”
George continued to practice medicine while dealing with his alcoholism. Ellen was able to work at her job in retail sales.
The Tax Court judge discussed the reasonable cause standards for abating late penalties. The taxpayer must show that he exercised ordinary business care and prudence in providing payment of his tax liabilities and nevertheless, was either unable to pay the tax or would suffer undue hardship if he paid the tax on the due date. However, even financial hardship does not affect a person’s ability to file.
The Tax Court judge did hold that alcoholism and depression are recognized as diseases by medical authorities. But the suffering has to be so severe as to preclude timely filing and payment. George did not offer any credible evidence that he was too disabled to file his return for 2013. He continued to practice medicine in between bouts of alcoholism and depression. The letter from the psychiatrist did not establish the severity of George’s condition. Besides, Ellen was sober and as a wage earner she had the affirmative duty to file the 2013 return even if George was unable to do so.
The Tax Court judge found that what George has was “selective inability to perform his tax obligations, while performing his regular duties as a physician.” There was no evidence that George was hospitalized after 1990. The judge stated, “We have regularly rejected ‘reasonable cause’ defenses based on alcoholism, depression, and other illness where the taxpayer continued to perform his/her regular business duties at the relevant times.”
Both George and Ellen had a continuing relationship with their accountant who regularly prepared their returns.
I was gratified that the Tax Court recognized alcoholism and depression as true medical diseases that can constitute reasonable cause for penalty abatement. In order to win your case before an SO or a judge, there must be documented history of treatment and confinement to the point where it is clear that one has been severely impacted by these diseases.
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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