IRS often imposes penalties on the taxpayers, but these penalties can be removed or reduced by IRS if the Taxpayer gives a reasonable excuse.
Interest is usually not reduced or cancelled. The IRS Manual (IRS Policy Statement P-2-7) states: “Any sound reason advanced by a taxpayer as the cause for delay in filing a return, making deposits or paying tax when due will be carefully analyzed.”
Examples of reasonable cause:
- Death or serious illness of the taxpayer or immediate family member.
- Unavoidable absence of the taxpayer.
- Destruction by fire or another casualty of the taxpayer’s place of business or records.
- The taxpayer was unable to determine the amount of deposit of tax due for reasons beyond taxpayer’s control.
- Taxpayer’s ability to make deposits or payments has been materially impaired by civil disturbances.
- Lack of funds is an acceptable reasonable cause for failure to pay any tax or make a deposit provided it can be demonstrated the lack of funds occurred despite the exercise of ordinary business care and prudence.
- Other explanations may be acceptable. Acceptable explanations of delinquency are not limited. Any reason establishing that the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time will be accepted as reasonable cause.