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Tuesday, May 15, 2012

Pursue Reasonable Cause Defense Outside Automated Decision Software, Gorman Says

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The Internal Revenue Service can assesses numerous penalties against employers in connection with payroll taxes — including for late filing, making late payments, and failing to pay electronically — so it is important for practitioners to understand the ways available to them for winning reduction or abatement of penalties for their clients, according to panelists at a May 11 program of the Employment Taxes Committee of the American Bar Association Section of Taxation.

Panelist Emily Lesniak, of the procedure and administration unit in the IRS Office of Chief Counsel, explained that failure-to-file and failure-to-pay penalties are coordinated so that they are not stacked. Failure-to-deposit penalties increase as time passes, and an additional penalty can attach when a deposit is not made using the Electronic Federal Tax Payment System that has become mandatory.

These delinquency penalties are generally assessed unless the taxpayer can show that the failure was due to reasonable cause, and not willful neglect. The company must exercise ordinary business care and not choose other vendors over the IRS when paying bills.

Mary Gorman, a former IRS employment tax official now with Ernst & Young LLP, recommended that in cases where a company with more than one person who could make the deposit, and where an errant keystroke could transfer funds to the wrong account, faces a potentially large penalty, it is smart to ask the IRS to remove the case from its automated reasonable cause determination system. The “reasonable cause assister” decision software so seldom finds in favor of the taxpayer, she said, that getting the case out of that system and into the hands of a human IRS employee may improve the chance of a reasonable cause finding.

Kathleen David
Editor, IRS Practice and Procedure
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