Forbes has published an article, “Pay IRS Penalties or Show Reasonable Cause,” which discusses the components of the reasonable cause exception. The article begins as follows:
Taxpayers claim that IRS penalties are not warranted for many reasons. One of the biggest and most misunderstood is the defense that a tax position was based on reasonable cause and that you acted in good faith. Those seem like friendly, easy-to-understand words, but they are actually terms of art. Even if a taxpayer thinks he or she complied with them as a matter of common sense, the IRS may not agree.
We’ll focus on reasonable cause, though there are other avenues, too. Among other things, how the IRS evaluates a defense depends on which penalty has been assessed. On top of reasonable cause, certain penalty defenses involve other concepts, such as an absence of willful neglect. Isn’t that proving a negative? Yes, it is.
Who wins in a tax penalty stalemate? This one should not be a surprise. The IRS does. Put differently, taxpayers bear the burden of substantiating their reasonable cause. Taxpayers all must exercise ordinary business care and prudence in reporting their proper tax liability. And remember, all tax returns are signed under penalties of perjury, so keep that in mind, too.
Posted by Melissa Zheng, Associate Editor, Wealth Strategies Journal.