This is a common question with respect to requests for relief related to IRA transaction errors. Unfortunately, there is no black and white answer. If a taxpayer petitions the IRS for relief, the taxpayer must provide evidence showing “reasonable cause.”
Although the IRS does not offer clear cut rules, there is some guidance that can be gleaned from regulations, private letter rulings (PLRs) 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. The IRS may also consider factors such as whether there was willful neglect on the taxpayer’s part, did the taxpayer use ordinary care and prudence, and whether the tax payer was diligent and took prompt action once the error was discovered.
For example, in the case Stine v. U.S., Mrs. Stine missed a gift tax filing deadline and sought relief from the IRS. She cited several health problems as “reasonable cause” for her failure to meet the deadline and presented proof of various health problems including pneumonia, recurrent upper respiratory infections, knee pain, knee replacement surgery, a thyroid growth, heart palpitations, and cataract surgery. The IRS still denied her request for penalty abatement…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. U.S. (Fed. Cl., Oct. 23, 2012, 10-445 T) 2012 WL 5207502