Tax Relief: What is “Reasonable Cause”?

Taxpayers who miss certain deadlines or fail to follow certain rules can try to seek relief by showing “reasonable cause” as to why a deadline or other rule wasn’t followed. But a common question arises: what constitutes “reasonable cause” in these situations?

Unfortunately there is no real black and white answer. Although the IRS does not offer clear cut rules, there is some guidance that can be gleaned from regulations, private letter rulings and court cases.

Reasonable cause is usually established by something wholly out of the taxpayer’s control such as grave illness, death or erroneous advice from the IRS itself. Other factors that may be considered include whether there was willful neglect on the taxpayer’s part, whether the taxpayer used ordinary care and prudence, and whether the tax payer was diligent and took prompt action once the error was discovered.

In a case that went to the Federal Court of Claims, Stine v. U.S., Mrs. Stine missed a gift tax filing deadline. She cited several health problems as “reasonable cause” and presented proof of various health issues including pneumonia, recurrent upper respiratory infections, knee pain, knee replacement surgery, a thyroid growth, heart palpitations, and cataract surgery. The Federal Court of Claims still denied her request for penalty abatement under the Tax Code…why?

Mrs. Stine’s evidence showed she was only in the hospital for one night and during this time she had made several other (arguably more complicated) transactions that were unaffected by her list of ailments. The Court denied her request for relief because she did not show reasonable cause under the circumstances and stated that “Mrs. Stine was only selectively incapacitated as to her gift tax obligations.”

The Court affirmed Mrs. Stine’s obligation to pay $450,000 in penalties plus $21,500 in interest, ouch.

Source: Stine v. United States, 106 Fed. Cl. 586, 588 (2012)