Popular Tax Excuses for Avoiding Penalties, Jail

Last updated on November 18, 2022

Tax non-compliance can be intentional or unintentional, but the punishment for it is real. Even though excuses can be made to avoid penalties and even imprisonment, the IRS will not believe them unless they are backed by facts. There are some excuses called ‘reasonable causes’ in IRS parlance that the IRS accepts for forgiveness of penalty. Certain excuses can even help avoid imprisonment. Forbes shares some of the tax excuses that work and some that do not work:

Bad advice from a professional tax advisor is an often used excuse. “It may be the most common way taxpayers use to establish ‘reasonable cause’ for some kind of error. It works well, although you must meet certain minimum requirements. And sometimes there are IRS penalties despite reliance on adviser.

Faults in tax preparation software can also be used as an excuse for tax non-compliance, as Forbes explains. “I used to think the Turbo Tax defense was silly, but no more. Former Treasury Secretary Tim Geithner used it and made it famous. His example prompted regular Joe taxpayers to try the TurboTax defense too.

“After a string of cases in which it failed, the Tax Court embraced it in Olsen v. Commissioner. Mr. Olsen was a patent attorney who blamed his tax mistakes on his tax preparation software. He claimed that should excuse penalties and the Tax Court agreed.”

Forbes explains further, “Some excuses can be basic, perhaps too much so. Remember the “I forgot” defense popularized by Steve Martin on Saturday Night Live? It’s unlikely to be effective.

Mental or substance abuse problems? There’s case law treating mental problems or substance abuse as a defense to criminal tax charges. Happily, few people are accused of tax crimes. Yet many face tax penalties of one sort or another.”

If there is a reasonable cause that led to non-filing or late filing of taxes, the IRS is likely to forgive penalties. Civil penalties for fraud are as high as 75 percent. Even though some excuses are hard to believe, they have worked. Forbes shares the particulars of a case:

“For example, an IT consultant and convicted fraudster was pretty effective in arguing against punishment for his tax crimes. He avoided going to jail by claiming that he committed tax fraud because of his bipolar disorder.”

“Andrew Mottershead filed false tax returns claiming extra business expenses, including for lavish items. Tax officials let him off with a warning, as long as he agreed to pay the money back. But then Mr. Mottershead did it again, filing more false returns and running up outrageous expenses.

“You guess it. Mottershead was prosecuted for a second time. He claimed he committed his crimes during manic episodes of bipolar disorder. The court believed him and spared him a prison sentence. The court sentenced him instead to a two-year suspended sentence.

“It clearly helped that the defendant was being treated for his mention condition. The judge said: ‘Where the balance lies between bipolar disorder and greed is very difficult to assess, and I’m not equipped to do it. But I can’t ignore the medical condition.’”

Even though nobody thinks about tax excuses when committing a tax crime, they become immensely important at payback time.