B. 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. 

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 following: 

A. Taxpayer's Reason. The taxpayer's reason should address the penalty imposed. To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based. If the dates and explanations do not correspond to the events on which the penalties are based, request additional information from the taxpayer that may clarify the explanation (See IRM 120.1.1.3.1).

B. Compliance History. Check the preceding tax years (at least 2) for payment patterns and the taxpayer's overall compliance history. The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care. If this is the taxpayer's first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for reasonable cause, since a first time failure to comply does not by itself establish reasonable cause. 

C. Length of Time. Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance. See IRM 120.1.1.3.1. Consider: (1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer's control, and (3) when the taxpayer complied with the law.

 D. Circumstances Beyond the Taxpayer's Control. Consider whether or not the taxpayer could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence but, due to circumstances beyond the taxpayer's control, the taxpayer was unable to timely meet the tax obligation. The taxpayer's obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late. 

3. Abatement of a penalty because the taxpayer established ordinary business care and prudence is identified by the use of Penalty Reason Code (PRC) 22 [IRM 120.1.1.3.1.2 ]

Ignorance of the Law 

1. In some instances taxpayers may not be aware of specific obligations to file and/or pay taxes. The ordinary business care and prudence standard requires that taxpayers make reasonable efforts to determine their tax obligations. Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances

2. For example, consider:

A. The taxpayer's education,

B. If the taxpayer has been subject to the tax,

C. If the taxpayer has been penalized, or;

D. If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know.

3. The level of complexity of a tax or compliance issue is another factor that should be considered in evaluating reasonable cause because of ignorance of the law.

4. Reasonable cause should never be presumed, even in cases where ignorance of the law is claimed.

5. The taxpayer may have reasonable cause for noncompliance if: 

A. A reasonable and good faith effort was made to comply with the law, or 

B. The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement. [IRM 120.1.1.3.1.2.1] 

Mistake was Made 

1. The taxpayer may try to establish reasonable cause by claiming that a mistake was made.

A. Generally, this is not in keeping with the ordinary business care and prudence standard and does not provide a basis for reasonable cause. 

B. However, the reason for the mistake may be a supporting factor if additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence.  [IRM 120.1.1.3.1.2.2] 

Forgetfulness 

1. The taxpayer may try to establish reasonable cause by claiming forgetfulness or an oversight by the taxpayer or another party caused the noncompliance. Generally, this is not in keeping with ordinary business care and prudence standard and does not provide a basis for reasonable cause. 

A. Relying on another person to perform a required act is generally not sufficient for establishing reasonable cause. 

B. It is the taxpayer's responsibility to file a timely and accurate return and to make timely deposits or payments. This responsibility cannot be delegated. 

2. Information to consider when evaluating a request for an abatement or non-assertion of a penalty based on a mistake or a claim of ignorance of the law includes, but is not limited to:

•  When and how the taxpayer became aware of the mistake.
   

• The extent to which the taxpayer corrected the mistake.
   

• The relationship between the taxpayer and the subordinate.
   

• If the taxpayer took timely steps to correct the failure after it was discovered.
   

• The supporting documentation. [IRM 120.1]..3.1.2.3]

Death, Serious Illness, or Unavoidable Absence

1. Death, serious illness or unavoidable absence of the taxpayer may establish reasonable cause for late filing, payment, or deposit for the following:

A. An individual: If there was a death, serious illness, or unavoidable absence of the taxpayer or a death or serious illness in the taxpayer's immediate family (i.e. spouse, sibling, parents, grandparents, children). PRC 24 indicates the incident occurred to the individual or a member of that individual's immediate family for filing, paying, or depositing.

B. A corporation, estate, trust, etc.: If there was a death, serious illness, or other unavoidable absence of the taxpayer (or a member of such taxpayer's immediate family), and that taxpayer had sole authority to execute the return, make the deposit, or pay the tax (person responsible). PRC 26 indicates the incident occurred to the person responsible [for] filing, paying or depositing.

2. If someone, other than the taxpayer or the person responsible, is authorized to meet the obligation, consider the reasons why that person did not meet the obligation when evaluating the request for relief. In the case of a business, if only one person was authorized, determine whether this was in keeping with ordinary business care and prudence.

3. Information to consider when evaluating a request for penalty relief based on reasonable cause due to death, serious illness, or unavoidable absence includes, but is not limited to, the following:

1. The relationship of the taxpayer to the other parties involved.

2. The date of death.

3. The dates, duration, and severity of illness.

4. The dates and reasons for absence.

5. How the event prevented compliance.

6. If other business obligations were impaired, and

7. If tax duties were attended to promptly when the illness passed, or within a reasonable period of time after a death or absence. [IRM 120.1.1.3.1.2.4]

Unable to Obtain Records

1. Explanations relating to the inability to obtain the necessary records may constitute reasonable cause in some instances, but may not in others.

2. Consider the facts and circumstances relevant to each case and evaluate the request for penalty relief.

3. If the taxpayer was unable to obtain records necessary to comply with a tax obligation, the taxpayer may or may not be able to establish reasonable cause. Reasonable cause may be established if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer's control they were unable to comply.

4. Information to consider when evaluating such a request includes, but is not limited to an explanation as to:
 

• Why the records were needed to comply.
   

• Why the records were unavailable and what steps were taken to secure the records
  

• When and how the taxpayer became aware that they did not have the necessary records.
   

• If other means were explored to secure needed information.
   

• Why the taxpayer did not estimate the information.
   

• If the taxpayer contacted the Service for instructions on what to do about missing information.
   

• If the taxpayer promptly complied once the missing information was received; and
   

• Supporting documentation such as copies of letters written and responses received in an effort to get the needed information.

5. Use PRC 25 if the taxpayer establishes reasonable cause because of an inability to obtain the records necessary to comply with a tax or information filing requirement. [IRM 120.1.1.3.1.2.5]

Statutory Exceptions & Administrative Waivers

These two very separate categories are placed together because in many instances an Administrative Waiver is an extension of rules that were provided for by statute. 

1. Tax legislation (Internal Revenue Code (IRC)) may provide an exception to a penalty. Specific statutory exceptions can be found in either the penalty-related IRC section or the accompanying regulations. For example:

A. IRC section 6654(e)(1), (2), or (3), Estimated Tax Penalties for Individuals (IRM 120.1.3).

B. IRC section 7502(a) and 7502(e), Timely Mailing Treated as Timely Filing and Paying (IRM 120.1.2).

C. IRC section 6724(a) or 6724(c), Waiver; Definitions and Special Rules, Information Return Penalties (IRM 120.1.7).

D. IRC section 6404(f), Abatement of Penalty or Addition to Tax Attributable to Written Advice of the Internal Revenue Service (see IRM 120.1.1).

E. IRC section 7508, Time for performing certain Acts Postponed by Reason of Service in Combat Zone. This provision applies only in a Presidentially-declared "Combat Zone."

2. Legislation with retroactive provisions may provide guidance on associated penalties. As a result of that retroactive provision, the Service may issue a News Release or other guidance with instructions for the disposition of the related penalties.

3. Some Statutory Exceptions are assigned their own Penalty Reason Code (see the specific topic). However, many are not. Statutory Exceptions in general are identified by the use of PRC 44. [IRM 120.1 1.3.2.1]

Administrative Waiver

1. The Service may formally interpret or clarify a provision to provide administrative relief from a penalty that would otherwise be assessed. An administrative waiver may be addressed in either a Policy Statement, News Release, or other formal communication stating that the policy of the Service is to provide relief from a penalty under specific conditions.

2. An administrative waiver may be necessary when there is a delay by the Service in:

A. Printing or mailing of forms

B. Publishing guidance, writing of regulations, or

C. Other conditions.

3. An example of an administrative waiver is Notice 93-22, 1993-1 C.B. 305. This allowed individuals who requested an automatic 4-month extension of time to file an income tax return, an extension of time without remitting the unpaid amount of any tax properly estimated to be due.

4. An administrative waiver is identified by PRC 43 [IRM 120.1.1.3.2.2]

Undue Hardship

1. An undue hardship may support the granting of an extension of time for paying a tax or deficiency. Treas. Reg. 1.6161-1(b), provides that an undue hardship must be more than an inconvenience to the taxpayer. The taxpayer must show that they would sustain a substantial financial loss if forced to pay a tax or deficiency on the due date.

2. The extension of time to pay does not provide the taxpayer with an extension of time to file. Nor does the extension of time to pay relieve the taxpayer of any appropriate penalties.

3. Undue hardship generally does not affect a person's ability to file and therefore would not provide a basis for penalty relief in a failure to file situation. However, each request must be considered on a case-by-case basis. Undue hardship may establish reasonable cause for failure to file on magnetic media, under Treas. Reg. 301.6724-1.

4. Undue hardship may also support relief from the addition to tax for failure to pay tax if, the explanation for the noncompliance supports such a determination. However, the mere inability to pay does not ordinarily provide the basis for granting penalty relief. Under Treas. Reg. 301.6651-1(e), the taxpayer must also show that they exercised ordinary business care and prudence in providing for the payment of the tax liability.

A. The taxpayer may claim that enough funds were on hand but, as a result of unanticipated events, the taxpayer was unable to pay the taxes.

B. Consider an individual taxpayer's inability to pay a factor when considering penalty relief if the taxpayer shows that, had the payment been made on the payment due date, undue hardship (as defined in Treas. Reg. 1.6161-1(b)) would have resulted. In the case where a taxpayer files bankruptcy, consider inability to pay a factor if the insolvency occurred before the tax payment date.

5. If a payroll was met, taxes were withheld and should be available for deposit. Employers must reserve money withheld from employees' wages in trust until deposited. The employer should not use the money for any other purpose. Undue hardship does not support relief from the IRC section 6672, Failure to Collect and Pay Over Tax, or attempt to Evade or Defeat Tax (Trust Fund Recovery Program).

6. Information to consider when evaluating a request for penalty relief includes, but is not limited to, the following: 

• When did the taxpayer know they could not pay?
   

• Why was the taxpayer unable to pay?
  

• Did the taxpayer explore other means to secure the necessary funds?
   

• What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements?
   

• Did the taxpayer pay when the funds became available?

7. An abatement of a penalty because the taxpayer experienced a "undue hardship" is identified by the use of PRC 29.[IRMK 120.1.1.3.2.3]

Advice

1. This section discusses three basic types of advice: written and/or oral advice provided by the Service, and advice provided by a tax professional.

2. Information to consider when evaluating a request for abatement or non-assertion of a penalty due to reliance or advice, includes, but is not limited to, the following:

A. Was the advice in response to a specific request and was the advice received related to the facts contained in that request?

B. Did the taxpayer reasonably rely on the advice?

3. The following examples address situations where a taxpayer relies on written advice from the Service regarding an item on a filed return.

A. The taxpayer did not reasonably rely on the advice regarding an item included on a return if the advise was received after the date the return was filed; 

B. A taxpayer may be considered to have reasonably relied on advice received after the return was filed if they then filed an amended return that conformed with such written advice;

C. A taxpayer may not be considered to have reasonably relied on written advice unrelated to an item included on a return, such as advice on the payment of estimated taxes, if the advice is received after the estimated tax payment was due.

4. Did the taxpayer provide the Service or the tax professional with adequate and accurate information?

5. The taxpayer is entitled to penalty relief for the period during which they relied on the advice. The period continues until the taxpayer is placed on notice that the advice is no longer correct or no longer represents the Service's position.

6. The taxpayer is placed on notice as the result of any of the following events that present a contrary position and occur after the issuance of the written advice:

A. Written correspondence from the Service that its advice is no longer correct or no longer represents the Service's position;

B. Enactment of legislation or ratification of a tax treaty;

C. A U.S. Supreme Court decision;

D. The issuance of temporary or final regulations; or 

E. the publication of a revenue ruling, revenue procedure, or other statement in the Internal Revenue Bulletin.

7. Taxpayers should submit the necessary supporting information and documentation with Form 843, Claim. However, if the information provided demonstrates that abatement of the penalty is warranted, the penalty should be abated, whether or not a Form 843 is provided  [IRM 120.1.1.3.2.4].

Written Advice from the Service

1. The Service is required by IRC section 6404(f) and Treas. Reg. 301.6404-3 to abate any portion of any penalty attributable to erroneous written advice furnished by an officer or employee of the Service acting in their official capacity.

2. If the taxpayer does not meet the criteria for penalty relief under IRC section 6404, the taxpayer may qualify for other penalty relief. For instance, taxpayers who fail to meet all of the above criteria may still qualify for relief under reasonable cause if the Service determines that the taxpayer exercised ordinary business care and prudence in relying on the Service's written advice.

3. Penalties abated as a result of reliance on erroneously written advice from the Service should be identified by PRC 44, Statutory Exception. [IRM 120.1.1.3.2.4.1]

Oral Advice from the Service

1. The Service may provide penalty relief based on a taxpayer's reliance on erroneous oral advice from the Service. The Service is required by IRC section 6404(f) and Treas. Reg. 301.6404-3 to abate any portion of any penalty attributable to erroneously written advice furnished by an employee acting in their official capacity. Administratively, the Service has extended this relief to include erroneous oral advice when appropriate.

2. In addition to considering the criteria provided in above, consider the following:

A. Did the taxpayer exercise ordinary business care and prudence in relying on that advice?

B. Was there a clear relationship between the taxpayer's situation, the advice provided, and the penalty assessed? 

C. What is the taxpayer's prior tax history and prior experience with the tax requirements?

D. Did the Service provide correct information by other means (such as tax forms and publications)?

E. What type of supporting documentation is available?

3. The following are types of supporting documentation:

A. A notation of the taxpayer's question to the Service;

B. Documentation regarding the advice provided by the Service;

C. Information regarding the office and method by which the advice was obtained; 

D. The date the advice was provided, and

E. The name of the employee who provided the information.

4. Penalties abated as the result of reliance on erroneous oral advice provided by the Service should be identified by using PRC 31 in the fourth reason code position. [IRM 120.1.1.3.2.4.2] 

Advice from a Tax Advisor 

1. Reliance on the advice of a tax advisor generally relates to the reasonable cause exception in IRC section 6664(c) for the accuracy-related penalty under IRC section 6662. See IRM 120.1.5, Preparer Promoter Penalty, and Treas. Reg. 1.6664-4(c).

2. However, in very limited instances, reliance on the advice of a tax advisor may apply to other penalties when the tax advisor provides advice on a substantive tax issue. 

3. Example: The employer researched all available Service publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were "contract labor" or employees. As a result, the tax advisor advised the employer that the workers were "contract labor" . However, the Service later determined that the workers were "employees" and not "contract labor" .

4. Reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer's responsibility to file, pay or deposit taxes cannot be excused by reliance on the advice of a tax advisor.[IRM 120.1.1.3.2.4.3]

Fire, Casualty, Natural Disaster, or Other Disturbance

1. Relief from a penalty may be requested if there was a failure to timely comply with a requirement to file a return or pay a tax as the result of a fire, casualty, natural disaster, or other disturbance.

2. Relief from a penalty because the taxpayer suffered from a fire, casualty, natural disaster, or other disturbance should be identified by the use of the appropriate PRC. It could be that as a result of the fire the taxpayer was unable to access their records (PRC 25) or as the result of an accident, the responsible party was hospitalized and unable to file the return or pay the tax (PRC 24 or 26).

3. Fire, casualty, natural disaster, or other disturbance are factors to consider. One of these circumstances by itself does not necessarily provide penalty relief.

4. Penalty relief may be appropriate if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer's control they were unable to comply with the law.

5. Factors to consider include: 

• Timing.
   

• Effect on the taxpayer's business.
   

• Steps taken to attempt to comply.
   

• If the taxpayer complied when it became possible.

6. The determination to grant relief from each penalty must be based on the facts and circumstances surrounding each individual case.[IRM 120.1.1.3.2.5]

Official Disaster Area

1. When a significant disaster occurs affecting a wide area of taxpayers, the Service often issues special instructions to facilitate evaluating the request for penalty relief.

A. Because there are one-time instructions, they will not be incorporated in this IRM. Districts, service centers, and customer service sites will be kept informed of any special instructions affecting their areas.

B. Penalty Relief granted because the taxpayer was located in an Official Disaster Area is identified by the use of PRC 28.[IRM 120.1.1.3.2.6]

Service Error

1. A Service error can be any error made by the Service in computing or assessing tax, crediting accounts, etc. See Exhibit 120.1.1-3, Penalty Reason Code Chart, for the appropriate PRC to be used when abating either a computer-generated or manually-input penalty. 

2. General Service Error (computer generated--PRC 15). This PRC should be used to identify penalties abated as the result of a Master File Recovery.

3. When an analyst, from any area of the Service, identifies a computer programming application that caused a penalty to be assessed in error, that analyst should: 

A. Contact Information Services (IS) to resolve the inadequate computer application , and

B. Include on the Request for Information Services (RIS) a statement indicating that PRC 15 must be used to identify any abatement of a penalty resulting from reversal of the computer application.

4. Other Service Error (manual input--PRC 45). This PRC should be used to identify penalties abated as the result of service errors that occur individually. Some examples are

A.  A math error when manually computing a penalty,

B. An extension of time to file that did not post to the Master File, or

C. Any other error, when it can be shown that (a) the taxpayer did in fact comply with the law, and (b) the Service did not initially recognize that fact. [IRM 120.1.1.3.3].

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