Payroll tax penalty problem? How a taxpayer show reasonable cause to excuse the penalty for failure to file or pay payroll taxes?

Are you a business owner or an officer facing a 941 payroll or employment tax problem?

Unpaid payroll or employment tax is a serious tax matter, and the IRS holds the business owner, officers and other personnel as responsible person(s) and actively enforce aggressive collection measures to collect on the unpaid back taxes, penalties and interest.

For the IRS to excuse the penalty for failing to file, the taxpayer must show that such failure was due to reasonable cause. A taxpayer can show reasonable cause by proving that he or she “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time” (see Reg. §301.6651-1(c)(1)). This standard is objective and will be determined by analyzing all the facts and circumstances.


Many of the litigated cases about whether a taxpayer’s failure to file was due to reasonable cause revolve around whether a taxpayer can rely on the claim of an attorney, CPA or an EA. In United State v. Boyle, the Supreme Court stated that a taxpayer can rely in good faith on an attorney or accountant’s expert advice relating to matters of tax. However, a taxpayer cannot rely on an attorney or accountant to make timely filings. Thus, taxpayers cannot meet the reasonable cause standard by showing that a law firm or accounting firm was handling their filings.

To be excused from the penalty for failing to pay the tax, the taxpayer must also show reasonable cause. The taxpayer can show reasonable cause by proving that he or she “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)) if he paid on the due date.” (Reg. 301.6651-1(c)(1) Consideration is given to all the facts and circumstances of the taxpayer’s finances, including the taxpayer’s lifestyle and expenditures in light of his income that could have otherwise been used to pay the tax.

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About Mike Habib, EA NTPI Fellow®:

Mike Habib, EA is an IRS licensed Enrolled Agent who owns and operates a specialized tax services boutique firm serving clients in various metro areas such as Los Angeles, Whittier, Pasadena, Glendale, Burbank, Orange County, Riverside, Palm Springs, San Bernardino, Palmdale, Bakersfield, New York, New Jersey, Chicago, Houston, Phoenix, Philadelphia, San Antonio, San Diego, Dallas, San Jose, Detroit, Jacksonville, Indianapolis, San Francisco, Columbus, Austin, Memphis, Fort Worth, Baltimore, Charlotte, El Paso, Boston, Seattle, Washington DC, Milwaukee, Denver, Louisville, Jefferson, Las Vegas, Reno, Hempstead, Tucson, Nashville, Davidson, Portland, Tucson, Albuquerque, Santa Fe, Anchorage, Atlanta, Long Beach, Fresno, Sacramento, Mesa, Kansas City, Cleveland, Virginia Beach, Omaha, Miami, Oakland, Tulsa, Honolulu, Minneapolis, Pittsburgh, Colorado Springs, Arlington, Wichita, Birmingham, Montgomery, Tampa, Orlando.