IRS Accepts Gambling Addiction as Reasonable Cause

In a previous blog we discussed what constitutes “reasonable cause” for abatement of federal income tax penalties.  Reasonable cause can be any situation beyond the control of the taxpayer that prevents the taxpayer from filing, paying or depositing taxes.  Common examples of reasonable cause are death or serious physical or mental illness.   While there is no published case or IRS ruling on point, in a very recent case I was able to convince the IRS that gambling addiction was a reasonable cause.

 In deciding whether a particular problem or set of circumstance amounts to reasonable cause, the IRS agent reviewing the abatement request will typically want answers to the following questions: (1) Why did these problems keep you from complying with your filing, payment or deposit requirements?  (2) Do you have a history of filing, paying or depositing taxes late?  (3) How were other financial matters handled during this time you had the problem?  (4) Did the time period you had the problem correlate to the time of the tax filing deadline or tax due date?  (5) Was your problem anticipated?  How beyond control of the taxpayer was the problem?  (6) Do you have written documentation to support your claim that a problem existed   such as doctors notices or hospital bills?

There is no special form that needs to be completed to make a request for abatement.  A letter addressed to the IRS collection agent requesting abatement of penalties, which sets forth the facts and includes copies of supporting documentation should be sufficient.

In a recent case I handled involving failure to timely deposit income and payroll taxes, IRS agreed to waive all penalties (and interest assessed on the penalties) based on gambling addiction as reasonable cause for failure to timely deposit.  While there were no published cases or IRS rulings on point, I was able to cite a Mayo Clinic study that indicated gambling addiction was a medical condition caused by an imbalance in the brain chemicals serotonin, norepinephrine (adrenaline) and dopamine, and that such condition prevented the addict from coping with business and financial pressures.        

If you have any questions about reasonable cause for penalty abatement, or need any assistance with a federal or state income tax matter, please give me a call or email at (937) 223-1130 or jsenney@pselaw.com.  And please send a copy of SenneySays to your to your friends.   

AND ONE MORE THING.  Too often business owners forget to prepare and sign a buy-sell agreement.  And way to often they forget to pull it out and see what the buy-sell agreement says.   If the owners do not have a buy-sell agreement in place, the occurrence of a trigger event such death, disability, or termination of employment can lead to confusion at least, and litigation at worst.  If you have any questions or comments about buy-sell agreements or succession planning, please call or email me at ..  Jsenney@pselaw.com or 937-223-1130.

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