If you’ve ever been penalized for late filing or late payments on your taxes, you’ll know how painful it can be. At a whopping 5% per month, the penalties can quickly add up.
You may have racked up large penalties due to financial difficulties or emergencies that made it impossible for you to file or pay the IRS on time. Thankfully, the IRS offers penalty abatement (also known as penalty waivers) in such situations.
Enter the IRS’ penalty abatement for reasonable cause. To get a penalty abatement for reasonable cause, you can either call or write a letter to the IRS. I recommend the latter, as it provides a record of your proposition and ensures that your argument is communicated exactly as you want it.
In this article, we’ll go over what reasonable cause is (with examples.) Then, I’ll tell you what’s needed to write a successful penalty abatement (reasonable cause) letter to the IRS.
Remember that the IRS also offers penalty abatement for cases other than reasonable cause.
Read: How to get penalty abatement from the IRS?
What is Reasonable Cause?
Reasonable cause refers to the situation where a taxpayer has used all business care and prudence to file or pay their taxes but was for some reason unable to do so.
To successfully argue for reasonable cause, you would have to argue that you didn’t miss your filing/payment wilfully and honestly attempted to meet your federal tax obligations. Essentially, your failure to meet IRS obligations was due to a dire situation that was out of your control.
What are some examples of Reasonable Cause?
I’ve grouped examples of reasonable cause under four broad categories:
- Disaster: Fire, flood, earthquake or any other disaster.
- Personal Emergencies: Death, serious medical emergencies, or physical/mental illness of yourself or your immediate family.
- Misguidance: You had acted under erroneous information from a publication or professional.
- Others: Any other event that may have put you in a situation where you used all business care and prudence but still were unable to meet your tax obligations.
Much uncertainty exists with regards to what constitutes reasonable cause. For example, does breaking your arm constitute a physical illness that prevented you from filing your taxes on time? Also uncertain is how much time must elapse between the reasonable cause event and your tax obligation due date.
Luckily, there are professionals that you can hire who have worked on a variety of successful reasonable cause cases. Such tax relief companies can help you prepare your letter of penalty abatement to improve your chances of success considerably.
Read: How can tax relief companies improve my chances of getting penalty abatement?
How to prove Reasonable Cause?
The facts that you must include in your penalty abatement letter to establish reasonable cause are as follows:
- What happened – provide the background of the case. Make sure you are clear about the key plot points in your story. Key plot points are the major developments that ultimately led to your failure to meet your tax obligations.
- When it happened – put your key plot points in a timeline so that the IRS can understand how much time elapsed between each development and how your filing/payment due date fits into the series of events.
- How your circumstances affected your ability to file/pay – The IRS may not be able to infer from your story how your filing/payment ability was affected. This is where you spell it out for them.
- Once your circumstances changed, what actions you took to comply – here you’ll show proof of a genuine attempt to file/pay your taxes. This will show the IRS that you’re not claiming reasonable cause merely to get out of your tax obligations.
It naturally follows from the last point that you should have filed or paid your taxes by the time you write your penalty abatement letter to the IRS. Doing so will engender goodwill with the IRS and show that you indeed intend to meet your obligations.
Which documents are required?
At a minimum, you’ll need to attach a copy of the tax bill in question.
You must also include facts in your penalty abatement letter to back up the circumstances that you write about in your letter.
For example, the IRS requires you to send in hospital records or a letter from a doctor with specific start and end dates. These records will prove that you were indeed incapacitated or too ill at the time to file/pay your taxes.
In the event of a disaster, you’ll need to show how the disaster prevented compliance. You may have to provide photographic evidence, insurance claims or news articles.
If you’re unsure of which documents to provide, you could contact the IRS or a tax relief professional who can help guide you in the right direction. I particularly recommend Community Tax, which covers federal tax issues in all states in the US.
Penalty Abatement (Reasonable Cause) Letter Sample
Here is a simplified IRS letter template that you can use when writing to the IRS:
To: Internal Revenue Service
(use the address provided in your tax bill)
Re: Request for Penalty Abatement under Reasonable Cause
[Your Social Security Number]
[MMM DD, YYYY]
I am writing to request an abatement of penalties in the amount of $[X,XXX.XX] as assessed in the enclosed notice that is dated [MMM DD, YYYY].
I acknowledge and deeply apologize for my [late filing/late payment]. The reason was due to [a disaster, serious medical condition, death in the family, an inability to obtain the relevant documents.]
The sequence of events that led to my [late filing/ late payment] is as follows:
On [MMM DD, YYYY] [event]. As a result, [outcome of the event]
- On [MMM DD, YYYY] I met with a serious car accident that left me with severe injuries. As a result, I was required to stay in hospital for the next [X] days and was not able to receive my tax bill.
- On [MMM DD, YYYY] I was discharged. Because I live alone, I needed to stay with my parents while I recuperated. My parents are elderly and live X hours away from me. As a result, we felt it was not practical for them to retrieve mail from my place.
- On [MMM DD, YYYY] I was well enough to return home. Upon my arrival, I sorted through my mail and noticed that my payment for the tax bill was overdue. I immediately took action to have the bill paid.
Please find the enclosed the documents enclosed that support my claim above:
[Document name]: [Proof that it provides]
- Invoice for my hospital stay: the highlighted portion shows the start and end dates of my visit.
- Picture of me in a wheelchair: this was during the time that I was reliant on my parents. The timestamp of the photo shows that it was taken on [MMM DD, YYYY]
- Payment advice from my bank: this shows that the check cleared my bank account on [MMM DD, YYYY].
Again, I sincerely apologize and hope that you will consider the abatement of penalties owed for reasonable cause. Please also consider that I besides this one oversight on my part, I have made all my other payments promptly.
I am willing to provide any clarifications that you may require. Please feel free to contact me at [XXX-XXX-XXX].
One more tip for successful penalty abatement letters
The IRS uses software called the Reasonable Care Assistant in evaluating whether a taxpayer is eligible for a first time penalty abatement.
Understanding how the Reasonable Care Assistant evaluates your situation can boost your chances of success. While the inner workings of the software are not widely known, some industry experts would be able to advise what it looks out for.
The software has also been heavily criticized for producing many incorrect results over the years. If your penalty waiver application was rejected by the IRS, a tax relief professional can persuade the IRS to amend their position.
In this article, I provided a sample letter for penalty abatement due to reasonable cause. You can certainly use this as a starting point for writing your letter.
However, your situation may not be as clear cut as the one we presented here. For example, how do you present and prove complex issues such as martial turbulence or a failure on the part of your tax preparer etc.?
You could always try to write the penalty abatement letter and see how the IRS responds. However, if you get rejected, you’ll have to undergo an appeals process. If you’re like me, you’ll want to put your tax issues behind you as quickly and painlessly as possible.
Thankfully, this is a preventable headache. Hiring a tax relief company can significantly help your chance of success and reduce the time and effort required to write a penalty abatement letter.
This is largely because a tax relief company:
- Has wide ranging experience in what situations can be considered reasonable cause
- Can tie your situations to the relevant policies and laws to help your case
- Know what types of documents can help to prove reasonable cause arguments
- Follows a successful penalty abatement letter writing formula
I personally recommend Community Tax for this purpose as it provides a free consultation and serves all states in the US. However, there are many other tax relief companies that can provide a basic level of service.
Read: How can tax relief companies improve my chances of getting penalty abatement?