Financial Difficulty Can Be Reasonable Cause in Employment Withholding Penalty

Although undecided in Minnesota, financial difficulties may constitute reasonable cause to abate penalties for nonpayment of tax. Keep in mind that the fact that Minnesota is undecided means two things, one, if you have a case that can get to court, the court will most likely find for you since the courts will look to surrounding circuit for their decision; and two, the personnel in IRS/State Appeals should and most likely may find for you based on the law in surrounding circuits.

Courts find the analysis of Fran and East Wind more persuasive than that of Brewery because “[t]o hold otherwise would effectively read out of the statute the “reasonable cause” exception to mandatory penalties in many employment tax cases.” Fran, 163 F.3d at 819.

The need to reject Brewery’s bright line rule is illustrated by the facts in this case. The district court found that the personal and business difficulties facing Van Camp and the corporation “created a great financial strain on Plaintiff corporation to the extent that there was some question whether the corporation would survive.” If the potential ruin of a corporation is not relevant, then the reasonable cause exception is virtually meaningless. A corporation’s financial difficulties can be a factor in deciding whether to abate penalties.