The tax attorneys at Nardone Law Group frequently remind our clients in Ohio and throughout the U.S. that the Internal Revenue Service (“IRS”) takes deadlines seriously. Taxpayers should take those deadlines seriously because the IRS will assess significant penalties against taxpayers who miss deadlines. In many instances, the IRS will not abate those penalties, even for a serious illness. In fact, only in extreme and unusual circumstances can an illness constitute reasonable cause for failing to file your federal tax returns on time. If you were late filing your federal tax return or paying your federal tax liability because of an illness, the penalties for failure to file may be abated only if the health problems were continuous and rendered you effectively unable to meet your federal tax obligations.
This article reviews a recent Court of Federal Claims case, Stine v. U.S, 106 Fed. Cl. 586 (Fed. Cl. 2012), to show how the court interprets reasonable cause for failure to timely file a federal tax return. (See attached case.) Stine reinforces how difficult it is for an illness to exempt an individual from penalties.
Failure to file federal tax returns or pay federal tax liabilities on time results in a penalty unless you can show that the failure is: (1) due to reasonable cause; and (2) not due to willful neglect. I.R.C. § 6651(a). Generally, to avoid the penalty, you must first show that, although you exercised ordinary business care and prudence, you were still unable to file your federal tax return on time. Second, you must demonstrate that the failure was not intentional or reckless (i.e., willful neglect).
Serious Illness Must Make It “Virtually Impossible” to Meet Federal Tax Obligations
In the majority of cases, the IRS will not excuse filing federal tax returns late because of illness. The illness must be beyond your control and render you unable to file your federal tax return. This is a high standard. As the Seventh Circuit stated, the illness must make it virtually impossible for an individual to file federal tax returns or pay a federal tax liability on time. For example, the courts have ruled that a hospital stay of several weeks may provide reasonable cause for delay in filing your federal tax return or paying your federal tax liability. Another court ruled that living with AIDs, taking antiviral medication, and having a nervous breakdown provided reasonable cause. Overall, facts must show that the illness rendered you unable to meet your federal tax obligations.
In Stine, as an example, the various ailments of the Taxpayer did not result in complete inability to file. The Taxpayer had a multitude of health issues including upper respiratory infections, pneumonia, knee pain, inpatient knee surgery, medication reactions, heart palpitations, and blurred vision. Nevertheless, the Court of Federal Claims held that this did not excuse filing federal tax returns late. The court found the following facts determinative: (1) the Taxpayer was not in a continuous state of incapacitation, and (2) the Taxpayer performed other financial transactions during the relevant time period, thus defeating her claim for reasonable cause.
Disability Must be Continuous
As evidenced by Stine, an intermittent incapacity does not constitute reasonable cause for failure to file a federal tax return on time. Because the Taxpayer was only temporarily incapacitated by surgeries and medication reactions, the Federal Court of Claims held that her disability was not continuous enough to provide reasonable cause for filing federal tax returns late. As Stine reveals, a series of health problems throughout the course of a year, in and of itself, probably will not provide reasonable cause for filing your federal tax return late. The illness must make you unable to meet your obligation to file taxes throughout the entire time period relevant to the obligations—usually January 1 to April 15. Severe mental or physical illness that leaves an individual incapacitated or hospitalized for an extended period of time may be continuous enough to provide reasonable cause for filing federal tax returns or paying federal tax liabilities late.
Contact Nardone Law Group
Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their tax payments to the IRS. The tax lawyers at NLG have vast experience in representing individuals who owe money to the IRS. A recent article about IRS collection alternatives can be found here. If you are struggling with tax liabilities or are interested in working with the IRS to review collection alternatives, you should contact an experienced tax attorney today. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available. Contact us today for a consultation to discuss your case.