Reasonable Cause Threshold in Tax Laws May Be Unreasonable

 Posted on June 20, 2023 in Taxation Law

There are numerous different situations where taxpayers may face tax penalties. IRS audits may determine that a taxpayer failed to file tax returns or other required forms or failed to pay taxes as required. In some cases, relief may be available that will allow taxpayers to avoid or reduce penalties, and in some cases, a taxpayer may be able to show that they were unable to comply with their requirements due to "reasonable cause." However, a recent court ruling shows that the standards used by the government to assess reasonable cause can be anything but reasonable.

Operating Engineers Local Union No. 3 v. United States

Operating Engineers Local Union No. 3 is the largest construction union in the United States, and prior to 2018, it had a record of over 100 years of full compliance with federal tax laws. However, in the third and fourth quarters of 2018 and the first quarter of 2019, the union failed to deposit payroll taxes as required. The IRS assessed a penalty of over $580,000, and the union paid this penalty. The union later sought a refund of the penalty, claiming that it had reasonable cause for its failure to meet its obligations.

The union's claims were based on its reliance on an employee to handle payroll tax issues and make timely payroll tax deposits. These matters were typically handled by the union's Accounting Manager. In 2015, a woman who had previously served as Accounting Manager was promoted to Finance Director, and a new Accounting Manager was hired. After that person resigned in June 2018, the Finance Director became responsible for handling the payroll tax duties. Due to confusion about whether a replacement had been trained to take over these duties, payroll taxes were not deposited as required during this time, and the problem was not discovered until December 2018. These issues were not fully corrected until audits were performed in the first quarter of 2019.

When seeking a refund of the penalty, the union stated that its ability to meet its tax obligations had been disabled by the Finance Director's inability to fully perform her duties. Due to her requirement to take on the responsibilities of both her position and that of the Account Manager, as well as personal issues related to the loss of family property in California wildfires, she was unable to handle all of her required duties. Because she had not provided an accurate picture of the situation to the union's board, they were unaware of the deficiencies.

While the actions of an employee without the knowledge of the board, as well as a history of over a century of tax compliance, would seem to indicate that the union had a reasonable cause for the violations, the United States District Court of the Northern District of California found otherwise. It based its decision on United States v. Boyle, a 1985 case that found that a reasonable cause defense may not be used if violations occurred because a taxpayer relied on an agent to file tax returns or pay taxes. Because the union relied on the Finance Director to manage tax responsibilities, had the capability to pay taxes as required, and was not prevented from meeting its obligations due to circumstances outside its control, the request for a return of the assessed penalties was dismissed.

Contact Our San Jose, CA Tax Penalty Defense Attorney

The standards used by the IRS and the courts can be very complex, and based on this case, it is clear that any violations could lead to significant penalties, regardless of whether a taxpayer had complied with all tax requirements in the past. This illustrates the importance of working with an experienced attorney to address tax compliance issues and defend against penalties for failure to file tax forms or pay taxes correctly. At John D. Teter Law Offices, our San Jose tax compliance lawyer can help taxpayers determine their best options for responding to audits or defending against penalties. To set up a consultation and get legal help with tax-related issues contact us at 408-866-1810.

Source:

https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/union-denied-refund-of-penalties-for-late-tax-filings%2C-payments/7fykb