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Can My Penalty Be Abated Under “Reasonable Cause?”

Sarah S. Kim, J.D., LL.M.

12.12.22 | SALT Chat

After a busy filing season, one of the frequently asked questions from my clients is whether the penalty and interest assessment on income tax notices they received could be waived. Late-file and late-pay penalties are commonly assessed penalties associated with tax filings.

The Rules

A late-file penalty is imposed when a taxpayer fails to file a return on the due date, including extensions to file. Generally, states grant an extension of time to file a return if a taxpayer has paid at least 90% of the tax by the original due date. Taxpayers sometimes end up not having met the required payment threshold due to adjustments unknown to them. This results in an invalid extension and a late-file penalty. The late-pay penalty is imposed when the taxpayer fails to pay tax shown on the return. A taxpayer in a late-file situation is often assessed with a late-pay penalty. States abate both penalties if the taxpayer can show that the failure to timely file the return and pay the tax was due to reasonable cause and not due to willful neglect.

What is “Reasonable Cause?”

“Reasonable cause” is a term of art. So, what a taxpayer would consider a reasonable basis for an abatement of penalty may not meet the reasonable cause standard. States do not define the term but, similar to the IRS, provide examples of reasonable cause.

New York and New Jersey regulations provide that the examples below may constitute reasonable cause:

  • The death or serious illness of the taxpayer or the taxpayer’s unavoidable absence from its usual place of business
  • Destruction of the place or business or business records by a fire or other documented casualty
  • Inability for reasons beyond the taxpayer’s control to obtain and assemble in a timely manner the essential information required for the preparation of a return, despite the exercise of reasonable efforts
  • There is a pending conference with the taxing authority or pending action or proceeding for judicial determination
  • Any other cause for delinquency that would appear to a person of ordinary prudence and intelligence as a reasonable cause for delay and which clearly indicates an absence of willful neglect

Administrative and judicial decisions provide additional guidance on whether the facts of the taxpayer’s case would be supported for reasonable cause. States look at the facts and circumstances on a case-by-case basis in determining whether reasonable cause exists. Generally, to request an abate of penalty, a taxpayer or an individual on the taxpayer’s behalf who has a personal knowledge of facts alleged as a basis for reasonable cause for failure to timely file or pay must submit a written request.

If you have any questions or need assistance in resolving your state tax notices, you can reach me at 646.346.6467 | skim@berdon.com or contact your Berdon Tax Advisor.

Sarah S. Kim is a Senior Tax Manager in Berdon’s State and Local Tax Group with over 10 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, unincorporated business tax, commercial rent tax, and real estate transfer tax.

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