What Qualifies as Reasonable Cause for Late Filing 990?
Demonstrating 'ordinary business care and prudence' is key to waiving late Form 990 penalties. This guide clarifies the IRS standard for reasonable cause.
Tax-exempt organizations are required to file an annual information return, most commonly the Form 990, with the Internal Revenue Service. This filing is a matter of legal compliance with firm deadlines. Failing to file on time can lead to significant monetary penalties under section 6652 of the Internal Revenue Code, which accrue daily until the return is submitted. For smaller organizations, this penalty is $20 per day, up to a maximum of $12,000 or 5% of the organization’s gross receipts, whichever is less. The IRS can waive these penalties if the organization provides a valid reason for the delay, known as “reasonable cause.”
Defining Reasonable Cause
The IRS defines reasonable cause as exercising “ordinary business care and prudence” in meeting filing obligations, where an organization was still unable to file on time. This standard means the organization must demonstrate it took the same degree of care that a prudent person would use in their own business affairs. The determination is made on a case-by-case basis, considering all facts and circumstances, and requires a clear explanation.
Certain situations are more likely to be accepted by the IRS as a valid basis for a reasonable cause claim, as they often involve unforeseen events beyond the organization’s control. For instance, the destruction of records due to a fire or flood is a common reason. The death, serious illness, or an unavoidable absence of the individual responsible for the filing can also qualify if it directly impaired the ability to file.
Another accepted circumstance is reliance on erroneous advice from a tax professional, like a CPA or an attorney. If an advisor provided incorrect information about the filing deadline and the organization reasonably relied on that advice, the IRS may grant relief. Similarly, if the organization received incorrect information directly from the IRS, this can serve as a strong foundation for a reasonable cause argument.
Conversely, common excuses are rejected if they do not meet the standard of ordinary business care. Simply forgetting the deadline or being unaware of the filing requirement is not a valid reason. A lack of funds to pay for a tax preparer is also not accepted, nor is blaming the delay on staff turnover or a volunteer’s mistake, unless the situation was truly exceptional and unavoidable.
Information and Documentation to Support Your Claim
A successful reasonable cause claim depends on the quality of the supporting evidence. An organization must compile documentation that corroborates its explanation. A detailed timeline of events showing how the circumstance led to the filing delay provides context for the supporting documents.
The type of documentation required is directly tied to the reason for the late filing. If the claim is based on the death or serious illness of the person responsible, the evidence should include a death certificate, doctor’s notes, or hospital records. These documents must demonstrate the individual was incapacitated during the period before the filing deadline.
For delays caused by a natural disaster, the evidence should be specific. This includes copies of insurance claims, police or fire department reports, and dated photographs showing the extent of the damage to the organization’s office or records. The goal is to prove that the event physically prevented access to or destroyed the necessary information.
If the claim rests on relying on erroneous advice from a tax professional, the documentation must be thorough. It should include a copy of the incorrect written advice, proof of the advisor’s professional credentials, and a statement explaining why it was reasonable to trust that advice. For an unavoidable absence, providing copies of travel itineraries or official military orders is necessary.
How to Request Penalty Abatement
Once your reason qualifies and you have gathered all documentation, you can formally request penalty abatement from the IRS. This is done by preparing a written statement that explains the facts. The statement should be signed under penalties of perjury, affirming the information is true and correct.
If the organization has not yet filed its Form 990, the reasonable cause statement and all supporting documents should be attached directly to the late return when it is filed. This proactive approach addresses the penalty issue at the outset. The statement should detail what prevented the organization from filing on time, explain why an extension was not requested, and describe the steps being taken to ensure future compliance.
If the organization has already filed the return late and received a penalty notice, such as a CP15 or CP215 notice, the process is different. In this case, the organization must send a written response to the address indicated on the notice by the specified deadline. This response must include the same detailed reasonable cause statement and copies of all supporting documentation.
After the request is submitted, the IRS will review the case and issue a determination letter. This letter will either state that the reasonable cause argument was accepted and the penalties have been abated, or it will deny the request. If the request is denied, the letter will provide an explanation for the decision and outline the organization’s rights to appeal the determination.