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When to use reasonable cause to waive a penalty

Don’t forget that filers with an information reporting failure penalty that is due to reasonable cause and not wilful neglect may be able to waive that penalty. Reasonable cause may be considered with respect to a failure to timely file correct information returns, failure to furnish timely a correct payee statement, and failure to comply timely with and to include correct specified information. Reasonable cause relief is not available in cases of fraudulent failure to file or fraud, in general.

In order to establish reasonable cause, the filer must show a few things.

  1. That it acted in a responsible manner before and after the failure occurred, meaning the filer exercised reasonable care and took necessary steps to file correct information returns, but events outside of its control occurred. The filer must undertake significant steps to avoid or mitigate the failure. Examples include, but are not limited to:
    • Requesting extensions of time to file in order to avoid the failure for late returns,
    • Attempting to prevent an impediment or a failure, if it was foreseeable,
    • Acting to remove an impediment or the cause of a failure once it occurred, and
    • Rectifying the failure as promptly as possible once the impediment was removed or the failure was discovered. The IRS considers a correction to be prompt if it is made within 30 days after the date the impediment is removed or the failure is discovered, or the earliest date on which a regular submission of corrections is made. The IRS considers submissions to be regular if they are made at intervals of 30 days or less. This reason is not available with respect to information that the filer cannot alter under specific information reporting rules.
  1. That there are significant mitigating factors with respect to the failure, or that the failure arose from events beyond the control of the filer. Significant mitigating factors include, but are not limited to:
    • The filer had never been required to file the particular type of return or furnish the particular type of statement, with respect to which the failure occurred, or
    • The filer is able to establish a history of complying with the information reporting requirement with respect to which the failure occurred. In this case, the IRS will consider:
  • Whether the filer received any prior penalties for the failure, and
  • If the filer received a prior penalty, the extent to which the filer successfully lowered its error rate year over year.

Events generally considered to be beyond the control of the filer include, but are not limited to:

  • Unavailability of the relevant business records. This unavailability must have been caused by a supervening event, such as a fire, casualty, statutory or regulatory change that directly impacts data processing, or an unavoidable absence (e.g., death or illness) of the person with sole responsibility for filing a return or furnishing a payee statement.
  • Undue economic hardship relating to filing on magnetic media. The filer must have lacked the necessary hardware and that it attempted to contract out the magnetic media filing to at least two unrelated parties, but determined that the cost was prohibitive. The filer must have submitted the returns on paper. This reason is not available where the filer sought the same in prior years.
  • Certain actions of the IRS. The filer must have reasonably relied on erroneous written information from the IRS. The IRS must have been aware of all facts in providing the guidance in order for it to be considered good faith.
  • Certain actions of an agent. The filer must have exercised reasonable business judgement in contracting with an agent to file timely correct returns or furnish timely correct payee statements with respect to which the failure occurred.
  • Certain actions of the payee or any other person providing necessary information with respect to the return or payee statement. The failure must have resulted from the failure of a payee or any other person required to provide information to the filer that would be necessary in order for the filer to comply with the information reporting requirements Look for are article next week for establishing reasonable cause where a filer’s failure relates to a taxpayer identification number (TIN), and the failure is attributable to the actions of the payee.

Look for our next post on how to request a waiver due to reasonable cause!

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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.

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