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When tax troubles qualify for IRS penalty relief

Taxpayers and their tax pros have faced many and new hassles this filing season, primarily because of COVID-19 challenges. Do any of these 2020 tax season situations qualify as an acceptable reason to waive associated filing penalties? Maybe.

 

Computer troubles

Technology, and especially tax tech, is great. Until it isn't.

That was my reaction when I learned that a lot of tax professionals were left in the lurch yesterday when their tax software provider's e-file system crashed just as they were submitting — or trying to — businesses clients' tax returns that were due Sept. 15.

The issue, as you can imagine, was the major discussion among tax pros. It was the lead item in CPA Joe Kristan's EideBailly tax blog roundup and the source of several #TaxTwitter threads.

One social media comment in particular caught my eye. It was posted by Logan Graf. He's a CPA with whom I share two other things beyond taxes: an Austin-area residence and a diploma from Texas Tech University.

Graf jokingly (sort of) demanded in the Tweet below some specific action from the Internal Revenue Service as we continue to grind through the 2020 tax season.

 

I'm among those on social media who enthusiastically embraced Graf's strong suggestion that no taxpayer face any penalties for tax missteps this year, be they the result of a deadline day technological glitch or some other problem.

COVID-19 complications and costs: The relief possibility also has been discussed offline, especially since there have been so many penalty possibilities in this COVID-colored 2020 tax filing season.

American Institute of CPAs (AICPA) officials have had some conversations with IRS officials about penalty relief and been told informally that practitioners who have made a good-faith effort to meet the filing deadlines on behalf of their clients but are unable to do so because of the coronavirus pandemic can write "COVID-19" at the top of the tax return to indicate the need for penalty relief, according to a recent report in Accounting Today.

"Based on our conversations, the IRS does not want to penalize people who are making a good faith effort," Melanie Lauridsen, senior manager for tax policy and advocacy at the AICPA, told AccountingToday.com editor-in-chief Michael Cohn.

"I think the IRS truly does understand that people are impacted by coronavirus, and unfortunately some people are impacted to the point where they just can't meet the tax deadlines," said Lauridsen.

Prior IRS relief precedence: The AICPA's position is based not only on the organization's communications with the IRS, but also the tax agency's longstanding practice of offering filing leeway and penalty relief to taxpayers affected by major disasters.

By any measure, the coronavirus pandemic definitely is a disaster.

Late_Tax_Returns_dismayed-taxpayer (2)

The IRS has not issued any official guidance here. But the agency did tell Accounting Today via a statement that:

"As always, facts and circumstances are important in any penalty determination. We understand the challenges faced by taxpayers due to the pandemic, and IRS remains flexible in granting penalty relief where taxpayers can demonstrate good-faith efforts in filing their returns."

Sound reasons for penalty relief: The IRS also referred to its special online page Penalty Relief Due to Reasonable Cause.

I'll let you peruse that information at your leisure if you believe you should be granted special penalty relief. But here are a few highlights.

The IRS says it will consider any sound reason for failing to file a tax return, make a deposit or pay tax when due. Sound reasons, if established, include:

  • Fire, casualty, natural disaster or other disturbances
  • Inability to obtain records
  • Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
  • Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.

One issue that may filers face, the inability to pay a tax bill, is not in and of itself, is not considered by the IRS as reasonable cause for failure to file or pay on time. That lack of funds, however, may meet reasonable cause criteria for waiver of the failure-to-pay penalty.

Establishing reasonable cause: In order to determine reasonable cause, you'll need to give the IRS sufficient details.

Among the questions that the IRS wants you to answer are:

  • What happened and when did it happen?
  • What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file and/or pay your taxes timely?
  • How did the facts and circumstances affect your ability to file and/or pay your taxes or perform your other day-to-day responsibilities?
  • Once the facts and circumstances changed, what actions did you take to file and/or pay your taxes?

Again, check out the full IRS web guidance on reasonable cause for penalty relief if you believe you qualify, as well as the agency's separate page on penalty relief in general.

You also might find these items of interest:

 

Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.

But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.

 

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