January 4, 2019 1:08 am

Financial Stress Is No Excuse for Nonfiling

Life’s ups and downs can disrupt things for taxpayers, but the Tax Court has made it clear that it’s no excuse for not filing tax returns. Take the following case where a taxpayer who worked in the financial services business was sailing along, earning over $400,000 a year. Then his income began to decline and his in-laws died. He didn’t file tax returns for three years and the IRS imposed a failure to file penalty and a penalty for not paying estimated taxes. He argued that the penalties should be waived for reasonable cause.

The Tax Court would not waive the penalties (Mehdy Namakian, TC Memo 2018-200). Reasonable cause may exist if a taxpayer’s or a family member’s illness or incapacity prevents the taxpayer from filing his or her tax return, but not if the taxpayer is able to continue his or her business affairs despite the illness or incapacity. In this case, he continued to work in financial services. In fact, he was able to earn $119,708, $211,919, and $149,912 for the three years in issue. Thus, there was no reasonable cause for not filing returns or paying estimated taxes.

Tax Glossary

Investment interest

Interest on debt used to carry investments, but not including interest expense from a passive activity. Deductions are limited to net investment income.

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