Court Cases: USA: Rosa Covington Packard: United States Supreme Court
Internal Revenue Code, Treasury Regulations and Internal Revenue Manual provisions involved
Section 6651 of the Internal Revenue Code provides, in pertinent part:
§ 6651. Failure to file tax return or to pay tax.
- Addition to the tax.
In case of failure --
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- to pay the amount shown as tax on any return specified in paragraph (1) on or before the date prescribed for payment of such tax (determined with regard to any extension of time for payment), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate;
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- Penalty imposed on net amount due.
For purposes of --
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- subsection (a)(2), the amount of tax shown on the return shall, for purposes of computing the addition for any month, be reduced by the amount of any part of the tax which is paid on or before the beginning of such month and by the amount of any credit against the tax which may be claimed on the return,
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26 USC § 6651.
Section 6654 of the Internal Revenue Code, 26 USC, provides, in pertinent part:
§ 6654. Failure by individual to pay estimated income tax.
- Addition to the tax. Except as otherwise provided in this section, in the case of any underpayment of estimated tax by an individual, there shall be added to the tax under chapter 1 and the tax under chapter 2 for the taxable year an amount determined by applying-
- the underpayment rate established under section 6621,
- to the amount of the underpayment,
- for the period of the underpayment.
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- Exceptions. * * *
- Waiver in certain cases.
- In general. No addition to tax shall be imposed under subsection
- with respect to any underpayment to the extent the Secretary determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience. * * * *
26 USC § 6654.
The Treasury Regulations, 26 C.F.R., provide, in pertinent part:
§ 1.6161-1 Extension of time for paying tax or deficiency.
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- Undue hardship required for extension. An extension of the time for payment shall be granted only upon a satisfactory showing that payment on the due date of the amount with respect to which the extension is desired will result in an undue hardship. The extension will not be granted upon a general statement of hardship. The term “undue hardship” means more than an inconvenience to the taxpayer. It must appear that substantial financial loss, for example, loss due to the sale of property at a sacrifice price, will result to the taxpayer from making payment on the due date of the amount with respect to which the extension is desired. If a market exists, the sale of property at the current market price is not ordinarily considered as resulting in an undue hardship.
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26 C.F.R. § 1.6161-1.
§ 301.6651-1 Failure to file tax return or to pay tax.
- Addition to the tax--
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- Failure to pay tax shown on return. In case of failure to pay the amount shown as tax on any return (required to be filed after December 31, 1969, without regard to any extension of time for filing thereof) specified in subparagraph (1) of this paragraph (a), on or before the date prescribed for payment of such tax (determined with regard to any extension of time for payment), there shall be added to the tax shown on the return the amount specified below unless the failure to pay the tax within the prescribed in paragraph (a) of this section, the Assistant Regional Commissioner (Alcohol, Tobacco and Firearms), to be due to reasonable cause and not to willful neglect. The amount to be added to the tax is 0.5 percent of the amount of tax shown on the return if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which the failure continues, but not to exceeed time is shown to the satisfaction of the district director, the director of the service center, or, as providd 25 percent in the aggregate. * * * *
- Showing of reasonable cause. (1) Except as provided in subparagraphs (3) and (4) of this paragraph (b), a taxpayer who wishes to avoid the addition to the tax for failure to file a tax return or pay tax must make an affirmative showing of all facts alleged as a reasonable cause for his failure to file such return or pay such tax on time in the form of a written statement containing a declaration that it is made under penalties of perjury. ... If the district director, the director of the service center, or, where applicable, the Regional Director, Bureau of Alcohol, Tobacco and Firearms, determines that the delinquency was due to a reasonable cause and not to willful neglect, the addition to the tax will not be assessed. If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause. A failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship (as described in § 1.6161-1(b) of this chapter) if he paid on the due date. In determining whether the taxpayer was unable to pay the tax in spite of the exercise of ordinary business care and prudence in providing for payment of his tax liability, consideration will be given to all the facts and circumstances of the taxpayer's financial situation, including the amount and nature of the taxpayer's expenditures in light of the income (or other amounts) he could, at the time of such expenditures, reasonably expect to receive prior to the date prescribed for the payment of the tax. Thus, for example, a taxpayer who incurs lavish or extravagant living expenses in an amount such that the remainder of his assets and anticipated income will be insufficient to pay his tax, has not exercised ordinary business care and prudence in providing for the payment of his tax liability. Further, a taxpayer who invests funds in speculative or illiquid assets has not exercised ordinary business care and prudence in providing for the payment of his tax liability unless, at the time of the investment, the remainder of the taxpayer's assets and estimated income will be sufficient to pay his tax or it can be reasonably foreseen that the speculative or illiquid investment made by the taxpayer can be utilized (by sale or as security for a loan) to realize sufficient funds to satisfy the tax liability. A taxpayer will be considered to have exercised ordinary business care and prudence if he made reasonable efforts to conserve sufficient assets in marketable form to satisfy his tax liability and nevertheless was unable to pay all or a portion of the tax when it became due.
26 C.F.R. § 301.6651-1.
PART 601 -- STATEMENT OF PROCEDURAL RULES
§ 601.106 Appeals functions.
- There are provided in each region Appeals offices with office facilities within the region. * * *
- Certain officers of the Appeals offices may represent the regional commissioner in his/her exclusive and final authority for the determination of--
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- Liability for additions to the tax, additional amounts, and assessable penalties provided under Chapter 68 of the Code, in any case originating in the office of any district director situated in the region, or in any case in which jurisdiction has been transferred to the region.
- The taxpayer must request Appeals consideration. * * * *
- Sections 6659(a)(1) and 6671(a) provide that additions to the tax, additional amounts, penalties and liabilities (collectively referred to in this subdivision as “penalties”) provided by Chapter 68 of the Code shall be paid upon notice and demand and shall be assessed and collected in the same manner as taxes. Certain Chapter 68 penalties may be appealed after assessment to the Appeals office. This post-assessment appeal procedure applies to all but the following Chapter 68 penalties:
- Penalties that are not subject to a reasonable cause or reasonable basis determination (examples are additions to the tax for failure to pay estimated income tax under sections 6654 and 6655); * * * * The appeal may be made before or after payment, but shall be made before the filing of a claim for refund. Technical advice procedures are not applicable to an appeal made under this subdivision.
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- The authority described in subparagraph (1) of this paragraph does not include the authority to: [exceptions inapplicable]
- Initiation of proceedings before Appeals. In any case in which the district director has issued a preliminary or “30-day letter” and the taxpayer requests Appeals consideration and files a written protest when required (see paragraph (c)(1) of Secs. 601.103, (c)(1) and (c)(2) of 601.105 and 601.507) against the proposed determination of tax liability, except as to those taxes described in paragraph (a)(3) of this section, the taxpayer has the right (and will be so advised by the district director) of administrative appeal to the Appeals organization. However, the appeal procedures do not extend to cases involving solely the failure or refusal to comply with the tax laws because of moral, religious, political, constitutional, conscientious, or similar grounds. * * * After review of any required written protest by the district director, the case and its administrative record are referred to Appeals. Appeals may refuse to accept a protested nondocketed case where preliminary review indicates it requires further consideration or development. No taxpayer is required to submit a case to Appeals for consideration. Appeal is at the option of the taxpayer. After the issuance by the district director of a statutory notice of deficiency, upon the taxpayer's request, Appeals may take up the case for settlement and may grant the taxpayer a conference thereon.
- Nature of proceedings before Appeals. Proceedings before Appeals are informal. * * * *
26 C.F.R. § 601.106.
1218 Policies of the Internal Revenue Service Handbook (6-5-89)
- All Service policy statements are contained in the Handbook, Policies of the Internal Revenue Service, IRM 1218, numbered to correspond to the Manual Part to which the policy has principal application. However, the policy statements apply to all Service personnel and activities.
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P-2-7 (Approved 12-29-70) Reasonable cause for late filing of return or failure to deposit or pay tax when due
Any sound reason advanced by the taxpayer as the cause for delay in filing a return, making deposits under the Federal Tax Deposit System, or paying a tax when due, will be carefully analyzed to determine whether the applicable penalty should be asserted. Examples of sound causes for delay which, if established, will be accepted as reasonable cause are shown below.
- Death or serious illness of the taxpayer or a death or serious illness in his/her immediate family ....
- Unavoidable absence of the taxpayer ....
- Destruction by fire or other casualty of the taxpayer's place of business or business records. * * *
Other explanations may be acceptable
Acceptable explanations of delinquency are not limited to the examples given above, since any reason for delinquency in filing or making deposits or payments which establishe[s] that the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time will be accepted as reasonable cause. * * * *
188.8.131.52.5 No Appeals Conference or Concession on Certain Arguments (9-15-98)
- As provided in Reg. 601.106(b), Statement of Procedural Rules, the administrative appeal procedures do not extend to cases involving solely the failure or refusal to comply with the tax laws because of moral, religious, political, constitutional, conscientious, or similar grounds. Such arguments will be given no weight in settlement.
120.1.1 Introduction [to the Penalties Handbook, IRM 120.1] and Penalty Relief (8-20-98)
184.108.40.206 Purpose of Penalties (8-20-98)
- Penalties exist to encourage voluntary compliance by supporting the standards of behavior expected by the Internal Revenue Service.
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220.127.116.11.1 Encouraging Voluntary Compliance (8-20-98)
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- Although penalties support and encourage voluntary compliance, they also serve to bring additional revenues into the Treasury, impose remedial charges against taxpayers, and indirectly fund enforcement costs. However, these results are not reasons for creating or imposing penalties.
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18.104.22.168.1 Reasonable Cause (8-20-98)
- Reasonable cause is based on all the facts and circumstances in each situation and allows the Service to provide relief for a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their [sic] tax obligations but is unable to comply with those obligations.
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- Reasonable cause relief is not available for all penalties; however, other exceptions may apply.
- For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but was unable to comply with a prescribed duty within the prescribed time, will be considered.
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- Taxpayers have reasonable cause when their conduct justifies the nonassertion or abatement of a penalty. Each case must be judged individually on the facts and circumstances at hand.
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22.214.171.124.1.1 Standards (8-20-98)
- Any reason that establishes a taxpayer exercised ordinary business care and prudence but was unable to comply with the tax law may be considered for penalty relief.
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126.96.36.199.1.2 Ordinary Business Care and Prudence (8-20-98)
- Ordinary business care and prudence includes making provision for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing the taxpayer exercised ordinary business care and prudence (taking that degree of case that a reasonably prudent person would exercise), but nevertheless was unable to comply with the law.
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120.1.2 Chapter 2 - Failure to File/Failure to Pay Penalties (8-20-98)
188.8.131.52.3 Penalty Relief (8-20-98)
- IRM 184.108.40.206, [sic] provides guidance for determining if the taxpayer meets the criteria that will allow relief from a penalty. * * *
- The Service will not impose the FTF/FTP penalty when the taxpayer shows reasonable cause and not willful neglect for the failure to file a return or pay a tax as required.
- Reasonable cause determinations MUST be made on the individual facts and circumstances of each case. IRM 220.127.116.11 provides guidance for determining if the taxpayer established reasonable cause.
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120.1.3 Chapter 3 - Estimated Tax Penalties
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18.104.22.168.1.4 Waiver Criteria Under IRC Section 6654(e)(3)(A) (8-20-98)
- For tax years beginning after December 31, 1983, IRC Section 6654(e)(3)(A) provides that the estimated tax penalty may be waived if the failure to make the estimated payment is due to casualty, disaster or other unusual circumstances such that the imposition of the penalty would be against equity and good conscience. This is not equivalent to reasonable cause.
- For example, reliance on the advice of a competent tax advisor [sic] may constitute reasonable cause that would warrant relief from other penalties, but it does not provide a basis for a waiver of the estimated tax penalty under IRC section 6654(e)(3)(A).
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