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Reasonable Cause and Requesting a waiver

With the possibility of penalty notices for 2020 information returns just around the corner, filers should consider their potential arguments to establish reasonable cause. As part of this process, they should review workpapers and issues identified during this reporting season.

To request a waiver of penalty due to reasonable cause, filers must submit a written statement to the district director or the director of the IRS Service Center where they normally file their returns. The statement must:

  • State the specific provision under which the waiver is being requested,
  • Set forth all the facts alleged as the basis for reasonable cause,
  • Contain the signature of the person required to file the return, and
  • Contain a declaration that it is made under penalties of perjury.

Filers must pay the penalty due upon notice and demand by the IRS and in the same manner as a tax liability is paid.

If the filer provides an explanation that supports its request for penalty relief, then the IRS will waive or abate the applicable penalty or penalties. The IRS will attach a copy of the information to the original return or other transaction documents.

If the filer does not establish reasonable cause and is not entitled to relief, then the IRS will either determine whether additional information could help establish reasonable cause or will document the decision and attach a copy to the original return. The IRS will provide written notification to the filer of the denial and any appeal rights. The notice will include:

  • Complete explanation of the IRS decision and basis for denial.
  • Information on the appeal procedures, including instructions on how to submit a written protest.
  • Power of attorney information.

So, what should filers consider when they identify a failure in the last reporting season that may be due to reasonable cause?

  1. Filer reason. Explain the support for a waiver using dates and explanations that correspond with events on which the penalties are based. Be prepared to provide additional information where the dates and events do not correspond correctly.
  2. Compliance History. Identify whether there has been a pattern of compliant or noncompliant behaviour in the preceding years (at least three) and whether the filer received the same penalty previously or if it was abated.
  3. Length of Time. Determine the amount of time between the event cited as a reason for the noncompliance and subsequent compliance.
  4. Circumstances Beyond the Control of the filer. Determine whether the filer could have anticipated the event that caused the noncompliance. For example, did a primary information reporting resource quit on January 15th and not share the location of key information.
  5. Acting in a responsible manner. Rectify failures as promptly as possible! Consider submitting corrections regularly or every 30 as provided for in the regulations.
  6. Unable to obtain records. Why the records were needed to comply? Why the records were unavailable and what steps were taken to secure the records? When and how did the filer become aware that he or she did not have the necessary records? Did the filer explore other means to secure needed information? Did the filer comply promptly once the missing information was received? Did the filer retain supporting documentation such as copies of letters written and responses received in an effort to get the needed information?
  7. Remember, relying on another person to perform a required act generally is not sufficient for establishing reasonable cause. It is the filer’s responsibility to file a timely return and make timely deposits or payments. This responsibility cannot be delegated.

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Reasonable Cause

This document contains general information only and is not a substitute for accounting, tax, or any other professional advice or services. The information provided is considered accurate at the time of publishing and will not be updated with new regulation requirements.

Comply Connect – March 2024 – Issue 9

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