I read with interest the article on “Representing Clients With Tax Delinquencies and Deficiencies” (“Tax Practice Corner,” April 09, page 65), as this is part of my practice. Of particular interest was the paragraph on abatement of penalties because that is often a key concern of delinquent clients. The authors indicated that penalties can be abated for “reasonable cause,” citing mental illness and medical problems as examples.
While it is true that mental illness and medical problems can constitute reasonable cause, the bar for abatement on these bases is high. The taxpayer must be “incapacitated,” to the point where she or he is unable to perform the required functions to prepare a tax return during the relevant time period (that is, when the tax return is due and for the time period after that until the return is filed). If the taxpayer is delinquent with respect to several years of tax returns, the long-term incapacitation required for abatement as a result of mental illness or medical problems will be almost impossible to establish in the majority of cases.
Robert A. Ladislaw, Esq., CPA
Authors’ reply : The reader makes an excellent point. If the client is delinquent in filing multiple tax returns, it will certainly be more difficult to meet the standard of reasonable cause. Moreover, general medical problems, not feeling good, stress or being overworked will likely be insufficient causes to meet the standard of reasonable cause. However, the facts and circumstances of each case will dictate whether a request for abatement of penalties should be submitted. In cases involving one or only a few years of delinquent returns, the authors have been successful in having penalties abated for such diverse reasonable causes as adult attention-deficit disorder, depression following the death of a spouse, alcoholism and, even in one instance, divorce.
A request for abatement of penalties should include a well-written letter detailing the reasonable cause and documentation supporting the underlying facts: letters from doctors, medical records, death certificates, insurance records or a police report if the medical excuse resulted from the taxpayer’s being a victim of a crime. The abatement request should also clearly show how the medical problems directly led to the taxpayer’s inability to pay the tax or file the return when due.
A taxpayer likely will succeed in getting penalties abated for late filing of a return if the facts show, for example, that close in time to the due date of the tax return his wife had been in the hospital for three months, which resulted in the taxpayer having to care for his four small children while also trying to keep his self-employed business from collapsing.
When tax resolution options (such as an offer in compromise or bankruptcy) that will eliminate the IRS debt are not available and the client is left with either a full-pay or an installment payment option, depending on the circumstances of the particular case, an abatement of penalty request is a resolution alternative that should not be overlooked by the tax professional. It is a relatively easy task to submit such a request. Nevertheless, penalty abatement requests should not be frivolously submitted.
Donald L. Ariail, CPA, DBA
Michael M. Smith, Esq., CPA
and L. Murphy Smith, CPA, DBA
College Station, Texas
[Editor’s Note: The authors’ affiliations were inadvertently omitted from their original article. Donald L. Ariail, CPA, DBA, is an associate professor at Southern Polytechnic State University. Michael M. Smith, Esq., CPA, is a shareholder at Baker, Donelson, Bearman, Caldwell & Berkowitz; and L. Murphy Smith, CPA, DBA, is a professor at Texas A&M University.]