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Penalty

 
  • 20.1   Penalty Handbook
    • 20.1.1   Introduction and Penalty Relief
    • 20.1.2   Failure To File/Failure To Pay Penalties
    • 20.1.3   Estimated Tax Penalties
    • 20.1.3   Estimated Tax Penalties (Cont. 1)
    • 20.1.4   Failure to Deposit Penalty
    • 20.1.4   Failure to Deposit Penalty (Cont. 1)
    • 20.1.4   Failure to Deposit Penalty (Cont. 2)
    • 20.1.5   Return Related Penalties
    • 20.1.5   Return Related Penalties (Cont. 1)
    • 20.1.6   Preparer/Promoter Penalties
    • 20.1.6   Preparer/Promoter Penalties (Cont. 1)
    • 20.1.7   Information Return Penalties
    • 20.1.7   Information Return Penalties (Cont. 1)
    • 20.1.8   Employee Plans and Exempt Organizations Penalties
    • 20.1.8   Employee Plans and Exempt Organizations Penalties (Cont. 1)
    • 20.1.9   International Penalties
    • 20.1.9   International Penalties (Cont. 1)
    • 20.1.10   Miscellaneous Penalties
    • 20.1.10   Miscellaneous Penalties (Cont. 1)

 

20.1.1.1  (08-20-1998)
Overview

  1. This section discusses the new chapter format of the Penalty IRM 20.1. It also includes the purpose of penalties, criteria for penalty relief, methods of appealing penalties, master file indicators and administrative procedures.

20.1.1.1.1  (08-20-1998)
Background

  1. In 1955 there were approximately 14 penalty provisions in the Internal Revenue Code. There are now more than ten times that number. With the increasing number of penalty provisions, the Service recognized the need to develop a fair, consistent, and comprehensive approach to penalty administration.
  2. In November 1987 the Commissioner established a task force to study civil penalties; in February 1989 the Commissioner’s Executive Task Force issued a "Report on Civil Tax Penalties." The report established a philosophy concerning penalties, provided a statutory analysis of the three broad categories of penalties (filing of returns, payment of tax, accuracy of information), and made recommendations where warranted to resolve the inconsistencies. Those recommendations were, in part:
    1. The Service should develop and adopt a single penalty policy statement emphasizing that civil tax penalties exist for the purpose of encouraging voluntary compliance.
    2. The Service should develop a single consolidated handbook on penalties for all employees. The handbook should be sufficiently detailed to serve as a practical everyday guide for most issues of penalty administration and provide clear guidance on computing penalties.
    3. The Service should revise existing training programs to ensure consistent administration of penalties in all functions for the purpose of encouraging voluntary compliance.
    4. The Service should examine its communications with taxpayers (including penalty notices and publications) to determine whether these communications do the best possible job of explaining why the penalty was imposed and how to avoid the penalty in the future.
    5. The Service should finalize its review and analysis of the quality and clarity of machine-generated letters and notices used in the Adjustments and Correspondence Branches of the service centers.
    6. The Service should consider ways to develop better information concerning the administration and effects of penalties. The Service should develop a master file database to provide statistical information regarding the administration of penalties. That information would be continuously reviewed for the purpose of suggesting changes in compliance programs, educational programs, penalty design and penalty administration.

     

  3. In keeping with the Commissioner’s Executive Task Force Report and Congressional recommendations, the consolidated penalty IRM was developed.

20.1.1.1.2  (08-20-1998)
Purpose of IRM 20.1

  1. The purpose of the consolidated penalty handbook is to provide guidance to all areas of the Service for all penalties imposed by the Internal Revenue Code. It sets forth procedures both for assessing and abating penalties and contains discussions on topics such as various types of relief from the penalties.
  2. IRM 20.1 replaces all other internal management documents dealing with the administration of penalties, such as IRMs and handbooks developed by various functions. IRM 20.1 is the primary source of authority for the administration of penalties by the Service. Service functions may develop reference materials for their individual needs, such as desk guides. However, such reference material must receive approval from the Penalties and Interest Office prior to distribution and remain consistent with (a) the procedures set forth in this IRM, and (b) the philosophy of the penalty policy statement.
  3. The penalty manual serves as the foundation for addressing inconsistent administration of penalties by various Service functions. By providing one source of authority for the administration of penalties, the Service greatly reduces inconsistencies regarding attitudes and
    procedures.

20.1.1.1.3  (08-20-1998)
Organization of IRM 20.1

  1. This manual is arranged in a user-friendly format. The chapters follow the logical sequence of events when working a penalty case. Appropriate headings are provided which describe the text that follows.
  2. The manual is designed for use both as an everyday reference guide and as a training document. Figures and examples are included in the text where they are most useful. Figures which are referenced frequently throughout the text are included as chapter exhibits to conserve space.
  3. The manual contains criteria, guidelines, and procedures for asserting, not asserting, and abating penalties. Chapters are included covering the penalty policy statement and philosophy, the application of reasonable cause, and the procedures for penalty appeals. The sections in IRM 20.1 are:
    • 20.1, 20.1.1, Background; 20.1.2, Purpose of Penalties; 20.1.3, Relief from Penalties; 20.1.4, Methods of Appealing Penalties; 20.1.5, Master File Indicators; 20.1.6, Administrative Procedures and Exhibits.
    • 20.1.2, Failure to File/Failure to Pay, IRC section 6651.
    • 20.1.3, Estimated Tax Penalties (ES). IRC section 6654 (Individual) and IRC section 6655 (Corporate).
    • 20.1.4, Failure to Deposit Penalties (FTD)
    • 20.1.5, Return Related Penalties
    • 20.1.6, Preparer/Promoter Penalties
    • 20.1.7, Information Return Penalties
    • 20.1.8, Employee Plans/Exempt Organizations
    • 20.1.9, International Penalties
    • 20.1.10, Miscellaneous Penalties

     

  4. This section contains Exhibits to assist the user in researching penalty issues:
    • 20.1.1–1, Penalty Policy Statement
    • 20.1.1–2, Penalty Relief Application Chart
    • 20.1.1–3, Penalty Reason Code Chart
    • 20.1.1–4, Penalty Transaction Codes
    • 20.1.1–5, Penalty Reference Numbers—500 Series
    • 20.1.1–6, Penalty Reference Numbers—600 Series
    • 20.1.1–7, Table of Abbreviations and Acronyms
    • 20.1.1–8, Dictionary of Key Terms.

     

20.1.1.1.4  (08-20-1998)
Responsibility

  1. Overall responsibility for penalty programs is assigned to the Penalties and Interest Office (OPIA). The OPIA is a matrix organization residing in Reporting Compliance (Small Business/Self Employed) Division. The OPIA is charged with coordinating policy and procedures concerning the administration of penalty programs, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, researching taxpayer attitudes and opinions, and determining appropriate action necessary to promote voluntary compliance.
  2. Every function is the Service has a role in proper penalty administration. It is essential that each function conduct its operations with an emphasis on promoting voluntary compliance. Appropriate business reviews should be conducted to ensure consistency with the penalty policy statement and philosophy. Attention should be directed to the coordination of penalty programs between offices and functions, to make sure that approaches are consistent and penalty information is used for identifying and responding to compliance problems.
  3. Managers should continuously review information for trends which may suggest changes in compliance programs, training courses, educational programs, penalty design, and penalty administration. Managers should institute, on an ongoing basis, a quality review system that evaluates the timely and correct disposition of penalty cases and encourages consistent administration of penalties.
  4. All employees should keep the following objectives in mind when handling each penalty case:
    1. Similar cases and similarly situated taxpayers should be treated alike.
    2. Each taxpayer should have the opportunity to have their interests heard and considered.
    3. Strive to make a good decision in the first instance. A wrong decision, even though eventually corrected, has a negative impact on voluntary compliance.
    4. Provide adequate opportunity for incorrect decisions to be
      corrected.
    5. Treat each case in an impartial and honest way (i.e., approach the job, not from the government’s or the taxpayer’s perspective, but in the interest of fair and impartial enforcement of the tax laws).
    6. Use each penalty case as an opportunity to educate the taxpayer, help the taxpayer understand their legal obligations and rights, and assist the taxpayer in understanding their appeal rights and, in all cases, observe the taxpayer’s procedural rights.
    7. Endeavor to promptly process and resolve each taxpayer’s case.
    8. Resolve each penalty case in a manner which promotes voluntary compliance.

     

20.1.1.1.5  (08-20-1998)
Administrative Information

  1. This section provides information on requesting changes, updating, and submitting proposed changes to IRM 20.1. It also provides security standards for this IRM.

20.1.1.1.5.1  (08-20-1998)
Requesting Changes and Updating IRM 20.1

  1. The Penalties and Interest Office (OPIA) has overall responsibility for coordinating and approving any update to IRM 20.1. OPIA’s role is to ensure consistency in penalty administration.
  2. The offices of the Director, Compliance and Field Territory Managers in the functional areas are responsible for the initiation and content of Policy Statements, Manual Transmittals, and Manual Supplements necessary to maintain IRM 20.1 on a current basis. This responsibility includes:
    1. Initially determining the need for an amendment of, or announcement calling attention to, provisions in IRM 20.1.
    2. Deciding whether a revision will be in the form of a Manual Transmittal for a direct and immediate update to the Manual or a Manual Supplement prescribing procedures for a temporary implementation period before inclusion in the Manual (direct amendment by Manual Transmittal is preferable).
    3. Ensuring accuracy and completeness of any revision and providing a statement regarding the effect on functional documents and other provisions of the Manual.
    4. Ensuring revisions and announcements conform with the style and format of the IRM.
    5. Coordinating proposed revisions and announcements with other units within a function, other functions as appropriate, and the OPIA.
    6. Prior to implementing these changes, obtaining approval from the OPIA.

     

  3. If special instructions are issued "in an emergency situation" , see text of Internal Management Document System Handbook. A copy of the document must also be furnished to the OPIA within 30 days of issuing the special instructions.

20.1.1.1.5.2  (08-20-1998)
Submitting Proposed Changes to IRM 20.1

  1. Functions in the field (area or service center) should follow the instructions currently in the Internal Management Document System Handbook. This IRM will provide local instructions for submission of proposed changes to National Headquarters.
  2. Headquarters personnel in the appropriate areas will forward the corrections as appropriate.
    1. All areas must forward the requested change, in writing, to OPIA, and OPIA will coordinate the requested change through the document clearance process.
    2. Corrections and updates will be verified, as appropriate, before they are incorporated into IRM 20.1.

     

20.1.1.1.5.3  (08-20-1998)
Security Standards

  1. Service officials and managers must communicate security standards contained in the Manager’s Security Handbook to subordinate employees and establish methods to enforce them.
  2. Employees are responsible for taking required precautions to provide security for the documents, information, and property which they handle in performing official duties.
  3. Employees using IDRS should only access those accounts required to accomplish their official duties. Any unauthorized access or browsing of tax accounts by employees is prohibited by the Service.
    1. Browsing is defined as looking at a tax account to satisfy a personal curiosity or for fraudulent reasons.
    2. Unauthorized access to taxpayer information is subject to disciplinary action including dismissal from the Service.

     

20.1.1.1.6  (08-20-1998)
Taxpayer Advocate Service (TAS) Guidelines

  1. While the Service is always striving to improve its systems and provide better service, some taxpayers still have difficulty obtaining a solution to a problem or an appropriate response to an inquiry. The purpose of TAS is to give taxpayers someone to speak for them within the Service—an advocate. TAS guarantees that taxpayers will have someone to make sure their rights are protected, someone to turn to when the system is not responsive to their needs. TAS steps in and takes action on behalf of taxpayers when their complaints or inquiries concerning problems related to Federal taxes meet TAS criteria. The purpose of the criteria is to ensure that problems and complaints which have not been handled properly through normal channels are included in TAS.
  2. To make sure that all taxpayer problems receive equal consideration, employees should accept the taxpayer’s statement of the problem at face value when deciding if the complaint or inquiry meets TAS criteria. However, employees should be aware that TAS is not intended to be used to circumvent their responsibility for resolving overage or difficult cases.
  3. In applying the criteria, it is necessary to use good judgement and to screen or probe the situation to determine if the complaint or inquiry should be included in the program.
  4. A complaint or inquiry which meets any of the following conditions will be included in the TAS:
    1. Any Service contact on the same case at least 30 days after an initial inquiry or complaint; or the second contact after 60 days from the filing of an original or amended return or claim.
    2. Any contact that indicates the taxpayer has not received a response by the date promised (including commitment dates on IRS forms).
    3. Any contact that indicates established systems have failed, or it is in the best interest of the taxpayer or the Service that the case be worked in TAS.

     

  5. A complaint or inquiry does not need to be sent to TAS if the problem has been corrected or will be resolved by completing all required actions and responding to the taxpayer (by telephone, preparing written correspondence, or sending an IDRS letter) on the same date the case is identified as meeting TAS criteria.
  6. Although the complaint or inquiry may appear to meet TAS criteria, e.g., second contact on the same issue, there will be instances when certain contacts should not be included in TAS:
    1. When it can be determined that the taxpayer has not used, or refuses to use, established administrative or formal appeals procedures, or
    2. When the complaint or inquiry only questions the constitutionality of the tax system.

     

  7. Please keep in mind that a "nonfilers" can have a legitimate problem which should be handled by TAS.
  8. Items meeting TAS criteria may be discovered at any point in the processing cycle. If the item or case meets TAS criteria, the case should be referred to the supervisor for referral to TAS.

20.1.1.1.7  (08-20-1998)
Form 911—ATAO

  1. Form 911, Application for a Taxpayer Assistance Order to Relieve Hardship (ATAO) may be initiated by a Service employee on behalf of the taxpayer to request review of an account if:
    1. The taxpayer is experiencing or about to experience a "significant hardship" ; and
    2. The non-TAS employee dealing with the problem cannot or will not relieve that hardship immediately.

     

  2. The Service may receive cases that qualify for an ATAO directly from the taxpayer or the taxpayer’s authorized representative (Form 911); or, through telephone contact or letter.
  3. Use normal procedures and the appeal processes before resorting to an ATAO. However, if these procedures or processes are not appropriate because they will not be timely in resolving the hardship or were not followed and a "significant hardship" exists, consider requesting an ATAO. It is never wrong to consider whether an ATAO is appropriate.
  4. "Significant hardship" is a highly subjective determination. A number of factors must be considered when making a determination of "significant hardship" . Enforcement action, in and of itself, is not a hardship without additional factors. For this reason, using good judgement after reviewing the pertinent facts and circumstances is the most important element in reaching the fair and reasonable decision.
  5. Significant hardship consideration must be made on a case by case basis. The Taxpayer Advocate (PRO) will make the final decision. To properly evaluate a hardship situation, consider the following points:
    • Will the taxpayer be able to retain housing?
    • Will the taxpayer be able to obtain food?
    • Will the taxpayer be able to retain utilities?
    • Will the taxpayer be able to retain or obtain transportation to and from work?
    • Will the taxpayer be able to remain employed?
    • Will the taxpayer be able to obtain essential medical treatment and/or medication?
    • Will the taxpayer be able to obtain reasonable clothing and/or shoes?
    • Will the taxpayer sustain an avoidable loss of education?
    • Will irreparable damage be caused to the taxpayer’s credit rating?
    • Will the taxpayer be unable to meet payroll and/or be in imminent danger of bankruptcy?
    • Is the hardship imminent?

     

  6. Below are some examples of potential "significant hardship" cases.
    1. A wage levy that impaired the taxpayer’s ability to purchase needed medication or medical care. The Service’s lack of awareness causes an unintentional negative impact and would qualify for an ATAO if the employee contacted cannot or will not relieve the hardship.
    2. A payment is improperly applied to a taxpayer’s account, thus blocking the taxpayer’s receipt of a refund. After many contacts with the Service, substantiated with dates, the taxpayer is suffering emotional stress and files a Form 911 for relief. An ATAO is appropriate to request action to substantiate the credit and authorize the refund.

     

  7. Below are some examples of cases which DO NOT show "significant hardship" .
    1. A taxpayer is experiencing a significant hardship because of a bank levy on his sole source of funds. The employee contacted is able to release the levy and initiate a payment agreement with the taxpayer. Because the employee resolved the hardship, an ATAO would not be warranted.
    2. The taxpayer complains that he will not be able to pay both the tax liability and the rent this month. The taxpayer has been current on previous rent payments, and the landlord has not contacted the taxpayer about the rent. The state where the taxpayer lives requires 60 days prior notice before eviction proceedings can begin. Because there is no imminent hardship, an ATAO would not be warranted.

     

  8. Action required:
    1. Immediately prepare Form 911 upon receipt of any telephone call, correspondence, or claim which shows need for an ATAO for which the non-TAS employee cannot or will not provide relief. Prepare Form 911 even if the taxpayer does not specifically ask for an ATAO. Attach the source document, if any, to Form 911. Functional management review is permissible, but should not delay the Form 911 in getting to the PRO. If functional management decides to provide the relief requested for internally identified Forms 911, they need not go to the PRO.
    2. Route all Forms 911 (including statute cases) to the TAS office immediately.
    3. Do not advise taxpayers that their case is being made an ATAO. The TAS office will respond to the taxpayer as necessary.
    4. Refer to the Problem Resolution Program Handbook for additional information on "significant hardship" and ATAO processing
      instructions.

     

  9. You may discover items meeting TAS criteria at any point in the processing cycle. If the issue or case meets any of the criteria, forward it to TAS.
  10. Note:the ATAO procedure will not result in forgiveness of a valid tax liability. It only delays enforcement action, if appropriate.

20.1.1.2  (08-20-1998)
Purpose of Penalties

  1. Penalties exist to encourage voluntary compliance by supporting the standards of behavior expected by the Internal Revenue Code.
  2. For most taxpayers, voluntary compliance consists of preparing an accurate return, filing it timely, and paying any tax due. Efforts made to fulfill these obligations constitute compliant behavior. Most penalties apply to behavior that fails to meet any or all of these obligations.
  3. Penalties encourage voluntary compliance by:
    • Defining standards of compliant behavior,
    • Defining remedial consequences for noncompliance, and
    • Providing monetary sanctions against taxpayers who do not meet the standard.

     

  4. These three factors support the public conviction that the tax system is fair and the penalty is in proportion to the severity of the
    noncompliance.

20.1.1.2.1  (08-20-1998)
Encouraging Voluntary Compliance

  1. Taxpayers in the United States assess their tax liabilities against themselves and pay them voluntarily. This system of assessment and payment is based on the principle of voluntary compliance. Voluntary compliance exists when taxpayers conform to the law without compulsion or threat.
  2. Compliant self-assessment requires a taxpayer to know the rules for filing returns and paying taxes. The Service is responsible for providing information to taxpayers, which includes:
    • Written materials that clearly explain the rules.
    • Forms that permit the self-computation of tax liability.

     

  3. In addition to (2) above, the Service must also provide a means to preserve and enhance our voluntary compliance by fairly, consistently, and accurately administering a system of penalties.
  4. Although penalties support and encourage voluntary compliance, they also serve to bring additional revenues into the Treasury, impose remedial charges against taxpayers, and indirectly fund enforcement costs. However, these results are not reasons for creating or imposing penalties.
  5. Penalties advance the mission of the Service when they encourage voluntary compliance. The Service has formalized this obligation to the public in its Mission Statement.
  6. Compliance is achieved when a taxpayer makes a good faith effort to meet the tax obligations defined by the Internal Revenue Code.
  7. Penalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.
  8. The Service has the obligation to advance the fairness and effectiveness of the tax system. Penalties should:
    • Be severe enough to deter noncompliance.
    • Encourage noncompliant taxpayers to comply.
    • Be objectively proportioned to the offense.
    • Be used as an opportunity to educate taxpayers and encourage their future compliance.

     

  9. Service personnel may educate taxpayers and encourage their future compliance by:
    1. Discussing causes for the delinquency and listening to taxpayer’s reasons and concerns for noncompliance,
    2. Ensuring that taxpayers understand their filing and paying responsibilities, and
    3. Being alert to information received in discussions with taxpayers that indicate possible reasons for abatement of a penalty.

     

  10. Penalties should relate to the standards of behavior they encourage. Penalties best aid voluntary compliance if they support belief in the fairness and effectiveness of the tax system. This belief encourages compliance in areas that cannot be reached through audits or other programs. The Service’s approach to penalties is embodied in Penalty Policy Statement P–1–18 (see Exhibit 20.1.1–1.)

20.1.1.2.2  (08-20-1998)
Fair and Consistent Approach to Penalty Administration

  1. The Service’s approach to penalty administration must ensure:
    1. Consistency: The Service should apply penalties equally in similar situations. Taxpayers base their perceptions about the fairness of the system on their own experience and the information they receive from the media and others. If the Service does not administer penalties uniformly (guided by the applicable statutes, regulations, and procedures) overall confidence in the tax system is jeOPIArdized.
    2. Accuracy: The Service must arrive at the correct penalty decision. Accuracy is essential. Erroneous penalty assessments and incorrect calculations confuse taxpayers and misrepresent the overall competency of the Service.
    3. Impartiality: Service employees are responsible for administering the penalty statutes in an even-handed manner that is fair and impartial to both the government and the taxpayer.
    4. Representation: Taxpayers must be given the opportunity to have their interests heard and considered. Employees need to take an active and objective role in case resolution so that all factors are considered.

     

20.1.1.3  (08-20-1998)
Relief From Penalties

  1. Generally, relief from penalties falls into four separate categories. They are:
    • Reasonable Cause
    • Statutory Exceptions
    • Administrative Waivers
    • Correction of Service Error.

     

  2. Appeals may recommend the abatement or nonassertion of a penalty based on these four criteria as well as "Hazards of Litigation."
  3. This chapter discusses each of these categories and the related criteria. Also, see LEM 20.1.3.
  4. In the interest of fairness, the Service will consider requests for penalty relief received from third parties, including requests from representatives without an authorized power of attorney. While information may be accepted, NO taxpayer information may be discussed with a third party, unless a power of attorney or other acceptable authorization is secured in writing from the taxpayer. See LEM 20.1..3.
    1. If additional information is needed, contact the taxpayer or the taxpayer’s authorized representative.
    2. If the validity of the request is questionable, contact the taxpayer.
    3. In all cases involving third party requests for penalty relief, advise the taxpayer of the request and the action taken.

     

20.1.1.3.1  (08-20-1998)
Reasonable Cause

  1. Reasonable cause is based on all the facts and circumstances in each situation and allows the Service to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.
  2. In the interest of equitable treatment of the taxpayer and effective tax administration, the nonassertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the Internal Revenue Code (IRC), Regulations (Treas. Regs.), Policy Statements, and Part 20.1.
  3. Reasonable cause relief is not available for all penalties; however, other exceptions may apply.
    1. For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but was unable to comply with a prescribed duty within the prescribed time, will be considered.
    2. See IRM Exhibit 20.1.1–2, Penalty Relief-Application Chart. If a reasonable cause provision applies only to a specific Code section, that reasonable cause provision will be discussed in the IRM 20.1 chapter relating to that IRC section.
    3. When considering the information provided in the following pages, remember that an acceptable explanation is not limited to those given in IRM 20.1. Penalty relief granted because the taxpayer provided an "other acceptable explanation" is identified by use of PRC 30 on either the closing or adjustment document.

     

  4. The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM sections for the rules that apply to a specific Code section.
  5. Taxpayers have reasonable cause when their conduct justifies the nonassertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of IRM 20.1.1.3.
    • What happened and when did it happen?
    • During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, or otherwise complying with the law?
    • How did the facts and circumstances prevent the taxpayer from complying?
    • How did the taxpayer handle the remainder of their affairs during this time?
    • Once the facts and circumstances changed, what attempt did the taxpayer make to comply?

     

  6. Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.

20.1.1.3.1.1  (08-20-1998)
Standards

  1. Any reason that establishes a taxpayer exercised ordinary business care and prudence but was unable to comply with the tax law may be considered for penalty relief.
  2. The following regulations contain examples of circumstances that may be helpful in determining if a taxpayer has established reasonable cause:
    • Accuracy-Related Penalty: 1.6664–4
    • Failure to Pay Penalty: 301.6651–1(c)
    • Failure to File: 301.6651–1(c)
    • Failure to Deposit Penalty: 301.6656–1(b); 301.6656–2(c)
    • Information Returns Penalty: 301.6723–1A(d); 301.6724–1
    • Preparer/Promoter Penalties: 1.6694–2(d); 301.6707–1T.

     

  3. The following Internal Revenue Service Policy Statements contain specific criteria that may affect the imposition of penalties.
    • P–2–4, Penalties and interest not asserted against Federal agencies.
    • P–2–7, Reasonable cause for late filing of return or failure to deposit or pay tax when due.
    • P–2–9, Timely mailed returns bearing foreign postmarks.
    • P–2–11, Certain unsigned returns will be accepted for processing.

     

20.1.1.3.1.2  (08-20-1998)
Ordinary Business Care and Prudence

  1. Ordinary business care and prudence includes making provision for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing the taxpayer exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless was unable to comply with the law.
  2. In determining if the taxpayer exercised ordinary business care and prudence, review available information including the