ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WHAT CONSTITUTES REASONABLE CAUSE FOR THE ABATEMENT OF SALES TAX PENALTIES – THE FINNISH LINE MOTORSPORTS CASE
By Robert S. Schriebman
I try not to get involved in sales and use tax matters as I leave these up to specialists in the field. Having said that, I ran across the Finnish Line Motorsports, Inc. case (Finnish Line) that clearly set forth what are the current standards used by California taxing agencies in determining whether sufficient cause exists to abate or remove certain penalties for the failure to timely file and timely pay California taxes. So even though Finnish Line involves sales taxes, we can apply the standards to the abatement of EDD penalties that depend upon good cause or reasonable cause for abatement. See in the matter of the Appeal of Finnish Line Motorsports, Inc., OTA Case No.: 18063369, May 14, 2019.
In this article we will review the facts in Finnish Line and set forth the standards used by the Office of Tax Appeals (OTA) in reaching its decision to deny abatement.
The Finnish Line Motorsports Case
A sales tax audit revealed that Finnish Line under reported its taxable sales by close to $2 million, and owed over $185,000 in back taxes. It also failed to make quarterly payments and file quarterly returns as required by law. As a result, a 40% penalty of almost $75,000 was assessed against the company. The President of the company argued that the 40% penalty should be abated because the corporate secretary, Mrs. M., responsible for tax compliance, failed in her duties. It was revealed however, that poor Mrs. M. did not have sufficient knowledge or training to accurately prepare quarterly returns and that she was also hindered by a medical condition which affected her ability to “make rational decisions and think clearly.” The OTA however, found that Mrs. M. was not supervised by the owner, and had no business being involved in tax compliance matters.
What is more important in this case is the standard set forth by the OTA that I believe will be used by the EDD and perhaps the FTB in determining standards for the abatement of penalties.
What Constitutes Reasonable Cause for the Abatement of Penalties?
The OTA set forth the appropriate provisions of the sales tax law (Revenue and Taxation Code), that established a broad overall standard, and applied the standard in denying relief to Finnish Line.
Overall Standard: Here is what the OTA said.
“If a person’s failure to make a timely remittance of sales tax reimbursement is due to reasonable cause or circumstances beyond the person’s control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person shall be relieved of the 40-percent penalty. (R&TC § 6597(a)(2)(B).”
What Specifically Constitutes Reasonable Cause?
The OTA set forth the following six criteria in determining that Finnish Line did not have reasonable cause for the abatement of the huge 40% penalty. Here is what the OTA had to say.
Reasonable cause or circumstance beyond a person’s control includes the following:
- Death or serious illness of the taxpayer or next of kin;
- An emergency of such magnitude that it caused a person to fail in his/her tax compliance;
- A natural disaster or other catastrophe that affected the operation of the business and impacted the ability to make timely compliance;
- The government’s failure to send returns or other information to the taxpayer’s correct address thus causing the taxpayer’s failure to make timely compliance;
- The failure to make timely compliance occurred only once over a three year look-back period;
- The taxpayer voluntarily corrected any errors and sent payment promptly after discovering those errors.
These rules and criteria may be found in R&TC Sec 6597(b).
These standards have been borrowed from criteria established by the IRS and other taxing agencies. For example, the Internal Revenue Manual provides that compliance penalties may be abated if it is the first time compliance failure occurred within the past three years. Most taxpayers are not aware of the “first time abatement rule.”
The OTA decision in the Finnish Line matter was correct in my opinion. The above criteria should be your starting point when seeking the abatement of compliance penalties. In addition, you should also consult Chapter 20 of the Internal Revenue Manual for the best set of reasonable cause standards to be used when you want to set forth your case for penalty abatement.
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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