The substance of a tax dispute will vary from one case to the next, depending on the nature of the issue involved, the type of business being examined, and the type of tax. One constant in any tax case, however, is the potential for the imposition of substantial civil tax penalties. When it comes to evaluating and contesting the propriety of penalties, keep in mind these three basic steps.
Know the purpose of the penalty
First, it is important to consider the purpose of tax penalties, which support the mission of the Internal Revenue Service only if they enhance voluntary compliance with tax laws. If penalties do not further the goals of voluntary compliance, they should not be asserted in the first place.
Demonstrate reasonable cause
Independent of policy considerations, the law often permits the non-assertion or abatement of penalties if the taxpayer can demonstrate the existence of “reasonable cause,” generally defined to mean the exercise of ordinary business care and prudence. An evaluation of the facts and circumstance often establishes that the taxpayer did exercise ordinary business care and prudence but was understandably upset or distracted by “life events,” such as the death of a family member, a serious illness, or an unavoidable absence. In these cases, penalties are unjustified.
Review the case law
Finally, the case law must be reviewed to see if there are prior reported cases indicating that a penalty will not be sustained by the courts. For example, simple negligence is sometimes mistaken for fraud and is used to justify the fraud penalty. The case law makes it clear, however, that negligence, whether slight or great, is not the equivalent of fraud with the intent to evade a tax believed to be due and owing and, therefore, cannot result in corresponding penalties.
Anthony E. Rebollo is a tax litigator from Columbia, S.C., at Richardson Plowden & Robinson, P.A. He focuses his practice on civil and criminal tax litigation, tax malpractice defense, and financial litigation. Best Lawyers has recognized Rebollo with the Columbia, S.C., 2018 “Lawyer of the Year” award in tax law. Rebollo was also selected in 2018 as one of the “Midlands Legal Elite” for tax law by Greater Columbia Business Monthly. He has been recognized as a South Carolina Super Lawyer for Tax Law and is listed in Who’s Who in America. If you have a complex tax litigation matter, contact Mr. Rebollo at 803-771-4400 or via email at email@example.com.