How the IRS evaluates a reasonable cause argument

The IRS applies a facts-and-circumstances test when considering reasonable cause. Key factors include whether the taxpayer:

  • Exercised ordinary business care and prudence, and
  • Could not meet the tax obligation despite those efforts.

Official guidance appears in IRS Publication 556 and the IRS penalty relief pages, which explain that each request is judged on its specific facts and supporting documentation (IRS Publication 556; IRS Penalty Relief page: https://www.irs.gov/businesses/small-businesses-self-employed/penalty-abatement). Cite these resources when preparing your submission so the reviewer can quickly see you followed IRS standards.

A clear workflow: How to structure your reasonable cause argument

In my practice guiding clients through audits, the most successful reasonable cause submissions follow a tight structure. Use this step-by-step workflow as your template:

  1. Quick summary (1 paragraph)
  • What happened, the tax period(s) affected, and the relief you seek (penalty waiver, abatement, or reduced penalty).
  1. Timeline of events (chronological bullets or table)
  • Dates and short descriptions of key events (illness, disaster, power outage, vendor failure, etc.).
  1. Evidence inventory (indexed exhibits)
  • Number every document (Exhibit A, Exhibit B) and reference each exhibit where you describe facts.
  1. Demonstration of care (actions you took)
  • Show what you did to comply before, during, and after the event (hiring a preparer, attempting EFTPS payment, backup procedures).
  1. Legal and factual conclusion
  • Tie facts to the IRS standard: explain why the evidence shows you exercised ordinary business care and prudence.
  1. Signature and contact information
  • Include a signed declaration that your statements are true to the best of your knowledge.

This organization reduces friction for the auditor and highlights the strongest facts early.

Evidence that strengthens a reasonable cause argument

Not all documents carry equal weight. Prioritize contemporaneous records and third-party confirmations:

  • Medical records, hospital admission/discharge summaries, and physician statements.
  • Police reports, insurance claims, FEMA or state disaster declarations (for natural disasters).
  • Bank and payment processor records showing attempted payments or returned transactions.
  • Email logs, travel records, or vendor correspondence proving supply-chain problems.
  • Proof of earlier compliance efforts: past filed returns, payroll deposit history, and internal controls documentation.

To see which documents to include and how to present them, FinHelp’s guides on penalty abatement and evidence can help: How to Request Penalty Abatement from the IRS and Preparing a Penalty Abatement Request: Documentation to Include.

(Internal links: “How to Request Penalty Abatement from the IRS”: https://finhelp.io/glossary/how-to-request-penalty-abatement-from-the-irs/; “Preparing a Penalty Abatement Request: Documentation to Include”: https://finhelp.io/glossary/preparing-a-penalty-abatement-request-documentation-to-include/)

Writing the reasonable cause letter: a template you can adapt

A concise, persuasive letter often accompanies supporting exhibits. Use plain language and avoid emotional hyperbole. Below is a compact template you can adapt.

  • Opening paragraph: Identify yourself/company, tax ID/EIN, tax period, and the penalty type. State you are requesting penalty abatement based on reasonable cause.

  • Second paragraph: One-paragraph summary of the triggering event (who, what, when, where).

  • Body paragraphs: Chronological detail with exhibit references. Each paragraph should cite the exhibit(s) that support the statement (e.g., “See Exhibit A: hospital record dated MM/DD/YYYY”).

  • Actions taken: Briefly list steps you took that demonstrate your care and efforts to comply.

  • Conclusion: Restate the relief sought and include a clear statement of truth (e.g., “I declare under penalty of perjury that the information provided is true and correct to the best of my knowledge.”) and signature.

Attach a one-page index of exhibits and append the documentation in the order you reference it.

Common factual themes that often succeed

  • Serious, documented illness or hospitalization preventing timely filing.
  • Natural disasters recognized by FEMA or a declared disaster area.
  • Death of an immediate family member with documentation.
  • Banking or electronic payment failures documented by the financial institution, especially when attempts were made before the due date.
  • Reliance on an incompetent or fraudulent tax preparer in rare cases where the taxpayer reasonably relied on a licensed preparer and can show steps taken to confirm the preparer’s work.

These themes align with IRS practice for penalty relief but are not automatic grants—documentation and the demonstration of reasonable care matter.

Mistakes that weaken a reasonable cause request

Avoid these common pitfalls I see in audits:

  • Presenting unsourced or post hoc explanations with no contemporaneous records.
  • Submitting disorganized packets with no exhibit index.
  • Focusing on sympathy rather than facts—emotion without documentation rarely persuades reviewers.
  • Waiting too long: submit your explanation as soon as possible during the audit or as part of a penalty abatement request. Delayed explanations may be treated skeptically.

Procedural tips: how and when to submit your argument

  • If an auditor requests an explanation during an audit, supply your organized packet promptly and follow the auditor’s submission instructions.
  • If you are outside the audit window and want to request abatement, use the IRS penalty relief page process, or file a written request with the office handling your account. See the IRS penalty abatement guidance (https://www.irs.gov/businesses/small-businesses-self-employed/penalty-abatement).
  • Keep copies of everything you send and note dates and delivery methods. If mailing, use trackable mail; if e‑mailing, save read receipts and attachments.

When to involve a tax professional or consider appeals

In my 15 years advising clients, involving a tax attorney, CPA, or enrolled agent paid off when:

  • The facts are complex (multiple tax periods, payroll tax issues, or civil/criminal exposure).
  • The IRS rejects an initial reasonable cause claim and an appeal to the Office of Appeals may be appropriate.
  • There is a potential for broader collection actions (levy, lien) that require concurrent protective steps.

FinHelp’s detailed articles on penalty abatement procedures can clarify next steps: Penalty Abatement Essentials: Building a Strong Reasonable-Cause Request (https://finhelp.io/glossary/penalty-abatement-essentials-building-a-strong-reasonable-cause-request/).

Sample exhibit checklist

  • Signed reasonable cause letter (1 page)
  • Exhibit A — Medical records or death certificate
  • Exhibit B — Insurance claims or FEMA/state disaster declaration
  • Exhibit C — Bank/payment processor records showing attempted payments
  • Exhibit D — Communications (emails, vendor letters)
  • Exhibit E — Proof of prior compliance (past returns, payroll history)

Index each exhibit and refer to it in your letter.

Final considerations and realistic expectations

Reasonable cause is a relief option, not an entitlement. While strong documentation and a clear narrative improve outcomes, the IRS still evaluates requests individually. If the IRS denies the request, you may have administrative appeals options; a tax practitioner can advise on the best path.

Authoritative guidance is maintained by the IRS: see Publication 556 for appeals and administrative procedures and the IRS penalty relief pages for current abatement processes (IRS Publication 556: https://www.irs.gov/pub/irs-pdf/p556.pdf; IRS Penalty Relief: https://www.irs.gov/businesses/small-businesses-self-employed/penalty-abatement).

Professional disclaimer

This article is educational and informational only and does not constitute tax, legal, or financial advice. For guidance tailored to your facts, consult a qualified tax professional. In my practice I always advise clients to gather contemporaneous evidence and to consult a licensed tax practitioner before filing formal requests.

Authoritative sources

Internal resources