Avoid IRS PenaltiesâReasonable Cause Is Surprisingly Reasonable
Robert W. Wood practices law with Wood LLP (www.WoodLLP.com) and is the author of Taxation of Damage Awards and Settlement Payments and other books available at www.TaxInstitute.com. This discussion is not intended as legal advice.
Robert W. Wood
Dear IRS, no penalties please! Taxpayers claim that penalties are not warranted for many reasons, but what works? One of the biggest yet most misunderstood protections for taxpayers is the defense that a tax position was based on reasonable cause, and the taxpayer acted in good faith. Those seem like pretty friendly, easy-to-under-stand words, but they are terms of art. Even if you think you comply with them as a matter of common sense, the IRS may not agree.
Among other things, how the IRS evaluates a defense depends on which penalty has been assessed, so you need to know that to see if you are, well, reasonable. In addition, on top of reasonable cause, certain penalty defenses involve other concepts, such as an absence of willful neglect. Isn’t that proving a negative? You bet.