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.
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