Reasonable Cause and IRAs

Reasonable Cause and IRAs

When it comes to correcting certain IRA mistakes, what does the IRS consider “reasonable cause”? This is a common question with respect to requests for relief related to IRA transaction errors. Unfortunately, there is no black and white answer but if a taxpayer petitions the IRS for relief, the taxpayer must provide evidence showing “reasonable cause.”

Absent clear-cut rules, some guidance can be gleaned from regulations, private letter rulings (PLRs) and court cases. Reasonable cause is typically established by something wholly out of the taxpayer’s control such as grave illness, death or erroneous advice from the IRS. Other factors such as willful neglect on the taxpayer’s part, lack of ordinary care, prudence or diligence may be considered.

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 the “reasonable cause” for her failure to meet the deadline. She 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 executed several other (arguably more complicated) transactions that were unaffected by her list of ailments. The Court found no reasonable cause and denied her request for relief noting “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

 

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