Blanche Creek has engaged your firm because she has been charged with failure to

Question

Blanche Creek has engaged your firm because she has been charged with failure to file her 2011 Federal Form 1040. Blanche maintains that the "reasonable cause" exception should apply. During the entire tax filing season in 2012, she was under a great deal of stress at work and in her personal life. As a result, Blanche developed a sleep disorder, which was treated through a combination of pills and counseling. Your firm ultimately prepared the 2010 tax return in 2014. The return showed additional tax due of $15,000. Blanche is willing to pay the delinquent tax and related interest. However, she feels that the failure-to-pay penalty is unfair, as she was ill. Consequently, she could not be expected to meet the usual deadlines for filing.

Determine the amount of the penalty for failure to file and research the reasonable cause exception to penalty. With all appropriate citations, stating an opinion as to whether Blanche will be successful in her request to have the penalty abated.

Explanation / Answer

As per IRS, a person should file tax return on time each year, even if taxes are not paid on time. The penalty for late filing is 5% of the unpaid taxes for each month or a part of the month that the tax is overdue. The penalty will start accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes. A person filing return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Resonable cause for non filing or late filing is considered on a case by case basis. It should not include an element of neglect or forgetfulness or inadvertness. As per the administrative code of Joint Committee on Administrative Rules - reasonable cause for abatement may be based on serious illness of the taxpayer.

Sleep disorders like sleep apnea can be cosnidered serious illness and hence Blanche will be successful in her request to have the penalty abated if her disorder was chronic or as serious as sleep apnea.

Source: http://www.mtrules.org/gateway/ruleno.asp?RN=42.3.105

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