Ask The California Employment Tax And Payroll Tax Attorney – How To Abate A Failure To Make An Estimated Tax Penalty

By Robert S. Schriebman

2023

Introduction

Most taxing agencies such as the IRS, FTB, and EDD have an extensive arsenal of penalties.  Most of these penalties can be abated by showing reasonable cause.  Reasonable cause for abatement is established by proving that the taxpayer exercised ordinary business care and prudence. There is one penalty that cannot be abated by this standard – the estimated tax penalty.  Whether we are talking about an individual assessment or a corporate or LLC level assessment, estimated tax penalties are different animals.

An estimated tax penalty cannot be abated by showing that one acted as a reasonably prudent business person.  The abatement of this penalty depends upon “good conscience”.

The rules for abating an estimated tax penalty are found in the California Revenue and Taxation Code, Section 19136.  This statute conforms to Internal Revenue Code Section 6654.  Code Section 6654(e)(3)(A) provides 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 equity and good conscience.  Note that the waiver criteria are not based upon reasonable cause.

The Appeal of V. Wang

Mr. Wang owned Celgene Corporation.  The Corporation was acquired in 2019 by Bristol-Myers Squibb Company.  Wang realized a capital gain of over $1 million dollars in the fourth quarter of 2019 but did not make the required estimated tax payment for the fourth quarter of 2019 which was due on January 15, 2020.  In mid-July 2020, he made an electronic payment of $153,000.  Part of that payment was an almost $1600 estimated tax penalty.  Wang paid the penalty and filed a claim for refund.  He argued that he did not have the necessary financial documentation to make a timely estimated tax payment.

The OTA Decision

The Office of Tax Appeals (OTA) denied the claim and stated that the abatement of an estimated tax penalty must be based upon equity and good conscience.  There must be a sudden, unusual, and unexpected event that caused the delay.  This could mean a casualty, disaster, or other unusual circumstance.  A large financial gain is not the type of unexpected event qualifying for relief.  A financial transaction resulting in a taxable gain, no matter how complex, is not an unusual circumstance warranting penalty abatement.

Conclusion

Most penalties assessed by the EDD, FTB and IRS may be abated for reasonable cause.  Reasonable cause means that a failure occurred despite the exercise of ordinary business care and prudence.  The laws do not require one to make a super-human effort at compliance.  The best way to abate a penalty is to present objective paper evidence of good faith compliance.  To abate an estimated tax penalty, one must show the sudden, the unusual, and unexpected.

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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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