Rosa Ditaranto filed her 2008 tax return in May, 2011. Generally speaking, that’s a problem. Ditaranto owed a significant liability with the return, on to which the IRS graciously tacked the following penalties:
“Failure to file” penalty pursuant to I.R.C. § 6651(a)(1): $24,820
“Failure to pay” penalty pursuant to I.R.C. § 6651(a)(2): $8,825
As a reminder, I.R.C. § 6651(a)(1) imposes the “failure to file” penalty when a taxpayer does not file their return by its properly extended due date. The amount of the penalty equals 5% of the tax required to be shown on the return for each complete or partial month the return is late, not to exceed 25% in the aggregate.
Section 6651(a)(2) imposes a corresponding “failure to pay” penalty for failing to pay timely the tax due on a Federal income tax return. The amount of the penalty equals 0.5% for each complete or partial month a taxpayer fails to pay the tax, not to exceed 25% in the aggregate.
The additions to tax under Sections 6651(a)(1) and (2) are imposed on the net amount due, meaning that the amount of tax due on the return is reduced by the amount of tax paid on or before its due date and allowed as a credit on the return.
Importantly, there is an exception to these penalties when a taxpayer can prove that the failures to pay and file were due to reasonable cause, and not willful neglect. Whether “reasonable cause” exists generally requires a facts and circumstances approach.
Ditaranto argued that her failures to file timely and to pay timely were due to a confluence of personal, professional, and financial difficulties that she faced between late 2000 and late 2011. Among the circumstances she cited on brief were:
2001: Her checkbook was stolen.
2001-2004: Her former business partner denied her access to records during a protracted lawsuit.
2010: Mother’s illness.
2011: Mother’s death.
2011-2012: Financial difficulties.
The Tax Court, while not unsympathetic to Ditaranto’s plight, concluded that none of these difficulties constituted “reasonable cause” for failing to handle her tax obligations. In reaching its decision, the court relied on the “life’s a bitch” judicial doctrine, maintaining that if you were to look at a 10-year span of anyone’s life, you’re bound to find the same smattering of nagging inconveniences and legitimate problems that plagued Ditaranto.
To test the court’s theory, I put together a brief chronology of my own worst moments from the past decade:
2002: Girlfriend leaves me for much shorter man.
2005: Wonka inexplicably discontinues delicious Laffy Taffy “Flavor Flippers” candy treat.
2006: Relentlessly bullied by Cobra Kai.
2007: Kim Kardashian discovered.
2008: Brain aneurysm.
2010: Kid learns to walk.
2011: Phillies lose NLDS Game 5 to Cardinals 1-0.
I must say, that was almost therapeutic. But while this list may paint a sadder picture than I anticipated, it does nothing to relieve me of my tax obligations. So if you intend to argue “reasonable cause,” be prepared to establish that there was at least one of the following:
- unavoidable postal delays;
- the death or serious illness of a member of the family;
- destruction of your records or place of business,
- the reliance on erroneous information given by an IRS employee, or
- the reliance on bad advice given by a tax professional.