Like New Zealand, the United States’ penalty framework aims to encourage voluntary compliance by taxpayers with all aspects of tax administration.
This includes:
- filing accurate and truthful returns on time, and;
- paying tax on time.
The Internal Revenue Service (IRS)’ penalty handbook contains the following civil penalties in the penalty framework:
- Failure to file/failure to pay penalties
- Estimated tax penalties
- Failure to deposit penalty
- Return Related penalties
- Preparer, promoter, material advisor penalties
- Employee plans and exempt organizations miscellaneous civil penalties
- International penalties
- Miscellaneous penalties
- Excise tax and estate and gift tax penalties
- Penalties applicable to incorrect appraisals.
Buttressing the model of voluntary compliance is the penalties framework. However, as in New Zealand, there may be some circumstances in which the remission of penalties is appropriate.
‘Reasonable cause’ is one of four separate categories under which relief from penalties may be available.
The other three categories are:
- Statutory exceptions
- Administrative waivers
- Correction of IRS error.
Internal Revenue Manual (IRM) section 20.1.1.3.2 sets out the criteria that the (IRS) will use to allow penalty relief for reasonable cause.
The term ‘reasonable cause’ is defined to include the following situations:
- The taxpayer exercised ordinary business care and prudence, can prove this, and yet was unable to comply with the law. The principle of ‘ordinary business care and prudence’ is fundamental to reasonable cause grounds for penalty remission.
- Death, serious illness or unavoidable absence occurred, in the case of the taxpayer being an individual, to the taxpayer’s immediate family, in the case of a corporation, estate or trust, to a taxpayer’s family if that taxpayer had sole authority to execute the return, make a deposit or pay the tax.
- Fire, casualty, natural disaster, or other disturbance prevented the taxpayer designated as an “affected person” from complying on a timely basis.
- Inability to obtain records may constitute ‘reasonable cause’ depending on the facts and circumstances in each case.
- A mistake does not constitute reasonable cause, however, the cause of the mistake may be taken into account.
- Erroneous advice or reliance may or may not constitute reasonable cause. Of note is that reliance on another party to comply on behalf is no basis for reasonable cause, because the taxpayer is responsible for meeting his or her tax obligations.
- Ignorance of the law can in some cases constitute reasonable cause, and weighs heavily on factors involving the taxpayer’s background including education, whether the taxpayer has been subject to the same tax, penalty history, changes to tax law that the taxpayer could not reasonably be expected to know complexity.
- Forgetfulness does not constitute reasonable cause.
(Source: IRM 20.1.1.3.2 – 20.1.1.3.2.2.7)