Penalties are generally payable upon notice and demand. Penalties are generally assessed, collected and paid in the same manner as taxes. The notice will contain the name of the penalty, the applicable code section, and how the penalty was computed (or information on how to obtain the computation if not included).

Generally the IRS looks at the four factors mentioned below to determine if a taxpayer acted with ordinary business care and prudence:

Reason: IRS employees are required to take into consideration the reason that a taxpayer failed to comply with the law. The reason should directly relate to the tax penalty and any dates should correspond with the explanation that led to the penalty.

Compliance History: If a taxpayer has a history of the same tax penalty being assessed against them, then the IRS will take this to mean that the taxpayer does not exercise ordinary business care and prudence with their tax matters.

Length of Time: The IRS will take into account the length of time between the event provided as the reason for non-compliance and any subsequent compliance.

Circumstances Beyond the Taxpayer’s Control: If a taxpayer was unable to anticipate an event and this event caused noncompliance, then the taxpayer exercised ordinary business care and prudence.

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