The existence of the elements that constitute reasonable cause, willful negligence or good faith is based on all facts and circumstances. Reasonable cause is established when the taxpayer exercised normal commercial care and prudence. Ordinary commercial care and prudence are defined as the degree of care that a reasonably prudent person would exercise, but who, nonetheless, cannot comply with the law. Section 6662 imposes penalties related to accuracy, but to get rid of them, the error must have been made with reasonable cause and in good faith.
Finally, section 6651 imposes the failure to file or pay a fine and establishes an exemption based on reasonable cause and the absence of willful negligence. In short, if you're trying to get rid of a fine that the IRS intends to impose, it's worth looking at the specific sanction in question. He wants to demonstrate how his facts and conduct meet all the required tests. In addition, in addition to reasonable cause, certain sanctioning defenses involve other concepts, such as the absence of willful negligence.
The IRS applies a fact-and-circumstance test on a case-by-case basis to determine if a taxpayer complies with the reasonable cause exception. The Sanctions Manual of the Internal Revenue Manual sets out a number of acceptable reasons that the Service will accept as “reasonable cause”. In fact, in many cases, tax regulations require that the taxpayer's request for exemption from the penalty be made in writing and even signed under penalty of perjury (Regs. Fortunately, however, those two penalties generally apply to very aggressive transactions that don't apply to most people or to most situations.
The AICPA Tax Section has an IRS penalty reduction template available for its members to use to support the reduction of penalties for reasonable causes. Fortunately, these two sanctions are more typical of highly aggressive transactions that do not apply to most people or to most situations. The IRS applies a fact-and-circumstance test on a case-by-case basis to determine if a taxpayer complies with the good faith and reasonable cause exception. Administratively, the IRS may set a penalty lower than the full amount based on the risks of litigation or based on evidence that the taxpayer had reasonable reasons to be late for part of the period in question.
To determine if a taxpayer exercised the usual business care and prudence, the IRS asks its agents to consider all facts and circumstances and to review all available information, such as the taxpayer's reason, compliance history, time period, and circumstances beyond the taxpayer's control. The same applies to penalties for an overstatement of gross valuation when requesting deductions for charitable contributions for property. How the IRS evaluates this defense depends on the sanction that has been imposed, so you should first know it to determine if it is, well, reasonable. For example, the IRS states that a taxpayer generally does not have a basis that justifies reasonable cause if the penalty relates to the late filing of a tax return or the payment of a tax liability.
