IRM 20.1.1.3: Reasonable Cause for IRS Penalty Abatement
Gain insight into the IRS's internal standards for penalty forgiveness. This guide explains the criteria agents use to evaluate a taxpayer's request for abatement.
The Internal Revenue Manual (IRM) contains the procedures and policies that Internal Revenue Service personnel follow. A specific section, IRM 20.1.1.3, provides the framework agents use to evaluate requests for penalty relief. This section establishes the standards for penalty abatement, where certain penalties can be removed if a taxpayer can prove their failure to comply with tax obligations was justified.
The Reasonable Cause Standard
The primary basis for penalty relief is the establishment of “reasonable cause.” This is a flexible standard based on a review of all the facts and circumstances of a case to determine if a taxpayer’s failure to file or pay was despite their best efforts. The IRM outlines several situations that may constitute reasonable cause, including:
- Death, serious illness, or unavoidable absence of the taxpayer or a member of their immediate family. The event must be directly linked to the inability to manage tax duties. For a business, this reason is accepted if the affected individual was the sole person with the authority to handle tax compliance.
- Ignorance of the law. A simple claim of not knowing a tax rule is not enough. A taxpayer must show they made a reasonable effort to determine their obligations, and the IRS evaluates factors like the taxpayer’s education and the complexity of the tax issue.
- A mistake or inadvertence. This applies to a situation where a taxpayer makes a reasonable error despite having systems in place to ensure compliance.
- Reliance on a tax advisor. A taxpayer must prove they provided the advisor with all necessary and accurate information and that the advisor was competent but gave incorrect advice. The taxpayer must also show they exercised ordinary business care in selecting the advisor.
Beyond the specific event, the IRS evaluates whether the taxpayer exercised “ordinary business care and prudence,” meaning they took the same degree of care that a reasonably prudent person would. A consistent history of timely filing and paying taxes strengthens the argument that the current failure was an anomaly. A history of penalties, however, can undermine a claim.
The IRS also examines the length of time between the event cited and the failure to comply; a close connection supports the claim. Furthermore, ordinary business care dictates that a taxpayer must comply with their tax duties as soon as they are able. Delaying compliance after the impeding circumstances are resolved weakens the argument that the taxpayer was acting in a responsible manner.
Information and Documentation for a Penalty Abatement Request
Building a successful case for penalty abatement requires gathering documentation to substantiate the claim. The evidence must directly support the reason cited for the failure to comply. For example, a request based on a serious illness should be accompanied by dated medical records or a letter from a physician detailing the condition and the period of incapacitation.
The formal document used to request penalty relief is IRS Form 843, Claim for Refund and Request for Abatement. When completing the form, you must provide precise details about the penalty, including the tax period, the type of tax, and the specific penalty amount.
The explanation section of Form 843 is where the taxpayer must construct a clear and persuasive narrative. The explanation should be a chronological account of the facts and circumstances that led to the noncompliance. It should detail what happened, when it happened, and how those events directly prevented the taxpayer from meeting their tax obligations.
The Process for Submitting a Request
After completing Form 843 and gathering all supporting materials, the request package should be mailed to the IRS. The correct mailing address depends on the type of tax penalty being contested and is provided in the instructions for Form 843.
Once the request is submitted, the IRS will send an acknowledgment letter confirming receipt. Processing timelines can take several months, during which the IRS may contact the taxpayer to request additional information or clarification.
The final decision will be communicated through a formal notice sent by mail. This notice will state whether the request for penalty abatement has been approved or denied. If denied, the notice will explain the reasons for the decision and provide information on the taxpayer’s appeal rights.