Subject: 6151 Reasonable Cause
Subject: 6151 Reasonable Cause
(c)(7) Exception for delinquency in payment due to reasonable cause and not due to willful neglect
The "failure to pay" penalties of Code Section 6651(a)(2) and 6651(a)(3) may be avoided if the delinquency is due to reasonable cause and not due to willful neglect. <98> Both of these elements must be present; reasonable cause must exist and willful neglect must be absent. In re Carlson, 126 F.3d 915 (7th Cir. 1997).
It is difficult to show that a failure to pay is due to reasonable cause and not due to willful neglect. However, a taxpayer can succeed by demonstrating that ordinary business care and prudence was exercised in providing for payment of the tax, but he was nevertheless unable to pay the tax or would have suffered undue hardship by making the payment on the due date. <99> In determining whether this exception applies, consideration is given to all the facts and circumstances of the taxpayer's financial situation, including his resources and expected receipts and expenses. Reg. Section 301.6651-1(c)(1) For example, penalties can be avoided if reasonable efforts were made to conserve funds in marketable form to provide for the expected tax liability, but not if "lavish" and "excessive" living expenses deplete the taxpayer's funds. Reg. Section 301.6651-1(c)(1) In addition, a taxpayer who has invested funds in illiquid or speculative assets has not exercised ordinary business care and prudence unless, at the time of the investment, (1) the remainder of his assets and estimated income will be sufficient to pay the tax, or (2) it reasonably can be foreseen that the investment can be utilized to realize sufficient funds to satisfy the tax liability. Reg. Section 301.6651-1(c)(1)
The nature of the unpaid tax is also a factor determining whether or not a taxpayer exercised ordinary business care and prudence. Reg. Section 301.6651-1(c)(2) For example, a given set of facts and circumstances may rise to the level of "reasonable cause" for non- payment of income taxes, but not for taxes withheld from a third-party and held in trust for the government. Reg. Section 301.6651-1(c)(2)
OBSERVATION: A split has developed between the Sixth Circuit and the Second Circuit as to whether a taxpayer's financial difficulties can ever excuse the penalties for failure to pay over withholding and employment taxes. The Sixth Circuit has said that financial difficulties can never excuse the penalties for non-payment of withholding taxes by an employer, but the Second Circuit rejected this bright-line rule. <100>
The Internal Revenue Manual offers a list of additional reasons for delinquency that may, if clearly established by the taxpayer, rise to the level of reasonable cause without willful neglect. <101> The list of reasons includes:
(1) Postal delays beyond the taxpayer's control;
(2) timely filing with the wrong IRS office;
(3) reliance on erroneous advice of an IRS officer or employee;
(4) death or serious illness of the taxpayer or a member of his immediate family; <102>
(5) unavoidable absence of the taxpayer;
(6) destruction residence, records, or place of business;
(7) failure of the IRS to timely furnish the taxpayer with the necessary forms;
(8) inability of an IRS representative to meet with the taxpayer when the taxpayer makes a timely visit to an IRS office in an attempt to secure information or aid in the preparation of a return;
(9) reliance on professional advice; <103> and
(10) inability to obtain necessary records for reasons beyond the taxpayer's control. <104>
(c)(8) Exception for fraud
The penalty for failure to pay tax does not apply if the failure to pay is due to fraud. Instead, the fraud penalty applies. As to pre-1990 failures, prior law Code Section 6653(d) so provides. As to post-1989 failures, Code Sections 6664(b) and 6651(f) so provide if a return is filed; if a return is not filed, then Code Section 6664 does not apply. For a discussion of the fraud penalty, see Section 606.6(c).
