IRS Says Brain Injury Not Reasonable Cause for Failure to File, Tax Court Disagrees

IRS Says Brain Injury Not Reasonable Cause for Failure to File, Tax Court Disagrees

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IRS penalties are  supposed to be assessed against a taxpayer only when his non-compliance is due to willful neglect rather than reasonable cause. Serious, debilitating health problems are almost always considered to be reasonable cause.

Joe Kristan found a recent Tax Court decision overruling the IRS’s finding that a taxpayer’s brain injury was not sufficient to excuse the late filing of her tax returns:

The IRS doesn’t think your little brain injury should excuse late filing of your tax return.  The Tax Court sets the stage:

Late in 1998 he abandoned the practice of medicine and became a full-time day trader. Four or five months later, petitioner wife suffered a severe head injury that resulted in a cerebral hemorrhage and coma.

Following brain surgery, petitioner wife became paralyzed on the left side of her body, and she had a limited memory.

At that time petitioners had two minor children and two children in college, and petitioner ceased day trading to care for his wife and children full time. It took more than 2 years for petitioner wife to be able to get around and manage her own care independently.

Initially, petitioner’s wife was unable to perform most of the basic functions of human existence, and petitioner taught her to walk, eat, dress, etc.

During 2001 petitioner began working as an appeals medical director for a health insurance company. Shortly after that, his wife developed a new condition known as “normal pressure hydrocephalus”.

This condition caused additional problems for petitioner and his wife, including her lack of balance, worsening short-term memory, and incontinence, among other things. She required additional brain surgery during July 2001 to implant a shunt in her cranial ventricle to allow drainage.

During the following 2 years petitioner’s income was insufficient to cover his family’s living expenses, and he amassed approximately $150,000 in debt.

The taxpayers fell behind on their 2001 and 2002 returns, not filing until February 2006.  The IRS thought there was no good excuse, and the taxpayers went to Tax Court:

The record reflects that after petitioner wife’s accident he was consumed by his constant attention to her needs during the period under consideration; by his unsuccessful attempt to earn enough money to pay the bills; by his obligation to care for his family; and by the maintaining of his household.

When the returns were due petitioner slept little and had no time for any other activity. Under these circumstances, petitioner attempted to maintain sufficient records but was nevertheless unable to file the tax returns within the prescribed time. Additionally, during that time petitioners’ returns were being audited, and there were substantial differences between the parties concerning the application of credits and overpayments from prior years.

The failure to file was not due to petitioners’ intentional failure or reckless indifference.

Decision for taxpayers.

Remember that Doug Shulman’s IRS is all about fairness.  We’ll see if the IRS asks Congress to close this new Brain Injury Loophole.

Read the entire case: O’Bryant, T.C. Summ. Op. 2011-101.

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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  1. It’s great they won this case! However, since this case was in small claims tax court it doesn’t set any precedents. SECTION 7463(b)

  2. Dave,

    The precedents were already there. The IRS overreached.