No Result
View All Result
SUBMIT YOUR ARTICLES
  • Login
Saturday, October 4, 2025
TheAdviserMagazine.com
  • Home
  • Financial Planning
    • Financial Planning
    • Personal Finance
  • Market Research
    • Business
    • Investing
    • Money
    • Economy
    • Markets
    • Stocks
    • Trading
  • 401k Plans
  • College
  • IRS & Taxes
  • Estate Plans
  • Social Security
  • Medicare
  • Legal
  • Home
  • Financial Planning
    • Financial Planning
    • Personal Finance
  • Market Research
    • Business
    • Investing
    • Money
    • Economy
    • Markets
    • Stocks
    • Trading
  • 401k Plans
  • College
  • IRS & Taxes
  • Estate Plans
  • Social Security
  • Medicare
  • Legal
No Result
View All Result
TheAdviserMagazine.com
No Result
View All Result
Home IRS & Taxes

Software Failures Can be Reasonable Cause for IRS Penalties – Houston Tax Attorneys

by TheAdviserMagazine
5 months ago
in IRS & Taxes
Reading Time: 7 mins read
A A
Software Failures Can be Reasonable Cause for IRS Penalties – Houston Tax Attorneys
Share on FacebookShare on TwitterShare on LInkedIn


What one expects as data or information a business would commonly capture and maintain has changed dramatically over time. Readers who are older will appreciate this. The truth is that businesses tracked financial ins and outs and a few other items in the 1980s and leading up to the early 2000s.

It was the addition of the PC, Windows, and applications like spreadsheets in the early 1990s that allowed businesses to start tracking information in masse. Prior to this creating and maintaining data was hard. It was expensive. And it was largely a manual input process. And it was boring.

Armed with new tools, corporate accounting departments and then operation departments got to work on accumulating data. The data accumulation compounded over years—and then decades. The decades after the adoption of PCs saw the growth of software to manage and use the data that was created and stored. Software went from helpful to required. And we are not talking any software. We are talking about several discrete specialized software that produces varying outputs–all of which require specialized skills to know how to use it and how to evaluate whether its outputs are correct.

It is this backdrop that poses the question as to what happens when the software does not work? What happens when that software fails to perform as expected? Does reliance on faulty software provide reasonable cause to abate penalties for unfiled information returns? The recent case of Dealers Auto Auction of Southwest LLC v. Commissioner, T.C. Memo. 2025-38, provides an opportunity to consider these questions.

Facts & Procedural History

The taxpayer in this case was a business that operates an automobile auction house in Phoenix, Arizona. In the normal course of business, the business regularly received cash payments exceeding $10,000. This triggered Form 8300 reporting requirements under the tax code.

This tax dispute wasn’t the business’ first experience with Form 8300 compliance issues. In 2014, the business had failed to file some Information Reporting Returns resulting in the IRS Sections 6721 and 6722 penalties in the amount of $21,200.

In response to these earlier failures, the business purchased AuctionMaster software from Integrated Auction Solutions (“IAS”). This softare included modules for specialized reporting, including Form 8300 preparation. According to promotional materials, the software “has been setup [sic], tested in audits and approved for use by the IRS.”

For 2016, the software generated 116 Forms 8300 for the business, but the IRS determined that the business should have filed an additional 266 Forms 8300. The IRS assessed penalties totaling $118,140 for these failures. The business did not realize its noncompliance until the IRS examination began. After learning of the failures, the company implemented corrective actions, clarified its filing obligations with the IRS, and implemented new internal controls.

In November 2019, the IRS sent the business a Notice of Federal Tax Lien Filing. The business requested a Collection Due Process hearing, challenging its underlying liability and seeking reasonable cause abatement of the penalties. For the CDP hearing, the Appeals Officer rejected the reasonable cause argument and the business filed its petition with the U.S. Tax Court for review.

Section 6050I Information Return Requirements

To understand this case, we have to start with the information return requirements.

Section 6050I of the tax code sets out information reporting requirements for large cash transactions. This requires any person who, in connection with their trade or business, receives more than $10,000 in cash in a single transaction (or two or more related transactions) to file an information return with the IRS.

The purpose behind this requirement is to help the government track large cash transactions that might otherwise escape detection. Cash transactions, by their nature, leave less of a paper trail than electronic payments or checks, making them potentially more susceptible to use in money laundering, tax evasion, or other financial crimes.

The information return filed with the IRS must identify the person from whom the cash was received, the amount received, the date and nature of the transaction, and other information as required by regulations. This information return is submitted on Form 8300.

Additionally, under Section 6050I(e), the business receiving the cash must furnish a written statement to each identified person containing specific information reported to the IRS. This statement must be furnished on or before January 31 of the year following the calendar year in which the cash was received.

What Are the Penalties for Form 8300 Filing Failures?

As with anything that is a “requirement” for tax purposes, there are penalties for failing to satisfy the requirement.

As it did in this case, the IRS can impose penalties for failures to file required information returns under Sections 6721 and 6722. These penalties apply to various information returns, including Forms 8300 required under Section 6050I.

Section 6721 imposes a penalty of $250 for each Form 8300 a business fails to file, not to exceed $3 million for any calendar year. This amount is subject to inflation adjustments. If a business corrects the failure within 30 days, the penalty is reduced to $50 per failure.

Similarly, Section 6722 imposes a $250 penalty for each payee statement a business fails to furnish, also capped at $3 million annually and subject to inflation adjustments. The penalty is likewise reduced to $50 per failure if corrected within 30 days.

In this case, the business had penalties assessed for $68,640 for 264 Forms 8300 that were more than 30 days late, $100 for 2 Forms 8300 less than 30 days late, $16,380 for 63 delinquent dealer notifications, and $33,020 for 127 delinquent “Runner” notifications, totaling $118,140.

When Does Reasonable Cause Apply to Information Return Penalties?

Congress has recognized that penalties are not always appropriate. For most civil tax penalties, Congress has provided a reasonable cause defense that can be used to avoid the imposition of penalties. Congress made this a discretionary provision that the IRS can apply or not apply.

As relevant for this article, businesses can avoid these penalties if they can demonstrate that the failure to file or furnish was due to reasonable cause and not willful neglect. Under Treasury Regulation § 301.6724-1(a)(2), a taxpayer has reasonable cause when either:

There are significant mitigating factors with respect to the failure, or

The failure arose from events beyond the filer’s control.

Additionally, the filer must also establish that it acted in a responsible manner both before and after the failure occurred.

Significant mitigating factors generally refer to first-time offenses, including situations where the filer was never previously required to file that particular type of return or has an established history of compliance. The business in this case could not claim these mitigating factors because it had previously filed these forms and had prior compliance failures.

Events beyond the filer’s control can include unavailability of business records, economic hardship related to filing on magnetic media, certain actions by the IRS, actions of an agent, or actions of the payee or another person providing necessary information.

The regulation does not specifically address software failures, but the IRS’s Internal Revenue Manual (its policy manual) acknowledges that failures related to software and hardware can constitute events beyond a filer’s control for purposes of the reasonable cause defense.

Can Software Malfunctions Provide Reasonable Cause?

The central issue in this case was whether reliance on allegedly malfunctioning software could constitute reasonable cause for failing to file information returns. This raises an important question for businesses that increasingly depend on specialized software for tax advice and compliance.

The tax court distinguished this situation from cases involving accuracy-related penalties, where it has generally held that “software does not constitute professional advice” for reasonable cause purposes. This is the so-called “turbo tax” defense that the court has rejected. The court noted that reliance on software is not available as a reasonable cause defense when the taxpayer fails to input correct information, citing Bunney v. Commissioner.

However, the tax court suggested that a software malfunction could potentially qualify as a failure beyond the filer’s control when the filer used the software correctly. The court acknowledged that Treasury Regulation § 301.6724-1(c)(1) does not preclude finding that a software malfunction could constitute reasonable cause.

The tax court also rejected the IRS’s argument that the duty to file information returns is non-delegable under United States v. Boyle–which is the leading court case that sets out the reasonable cause defense. The court noted that Boyle does not preclude the application of reasonable cause when a filer is misadvised about the need to file a return. The business here wasn’t arguing that it delegated its filing obligation to the software, but rather that the software failed to notify it that returns needed to be filed.

Why Was There No Reasonable Cause Here?

Despite the court’s openness to the possibility that software failures could constitute reasonable cause, the court concluded that the business here did not qualify for reasonable cause for two key reasons.

First, the business failed to establish that the software actually malfunctioned. The record was unclear about how the software allegedly failed. The instructions suggested the software prepared Forms 8300 for printing, but the business claimed the software filed the forms automatically. The court could not determine whether the supposed failure was a failure to create the required forms or a failure to file them. Communications between the busienss and IAS (the software maker) mentioned “improved” features in a software update, but nothing in the record established that the software was failing to perform as intended.

Second, the business failed to demonstrate responsible behavior before and after the failure. The court noted that the business did not establish that it was correctly using the software or that data was being entered correctly. The record provided no insight into the business’s installation, training, or use of the software.

Moreover, the business did not establish that it took reasonable steps to foster compliance. The significant drop in the number of Forms 8300 generated by the software in 2016 (116) compared to the required filings in 2014 (at least 212) should have alerted the company that something was wrong. The court noted that the business offered no explanation for why this reduction would have appeared reasonable.

The Takeaway

This case shows that while software failures may potentially constitute reasonable cause for penalty abatement, businesses must do more than simply blame the software when things go wrong. To establish reasonable cause based on software failures, businesses must document how the software was supposed to work, how it actually worked, and what steps they took to ensure compliance despite the failure. This puts the focus on gathering information after the tax compliance problem is discovered to document the “why” for the compliance problem that had already occurred. Creating and keeping these post-event records should be the focus.

Watch Our Free On-Demand Webinar

In 40 minutes, we’ll teach you how to survive an IRS audit.

We’ll explain how the IRS conducts audits and how to manage and close the audit.  



Source link

Tags: AttorneysFailuresHoustonIRSpenaltiesReasonableSoftwaretax
ShareTweetShare
Previous Post

Buffett says US shouldn’t use “trade as a weapon” as Trump has done with tariffs

Next Post

Activist Fivespan has a stake in Qiagen. Three levers to boost growth

Related Posts

edit post
Canada Budget 2025: Expensing Tax Reform Options

Canada Budget 2025: Expensing Tax Reform Options

by TheAdviserMagazine
October 3, 2025
0

Geopolitical tensions are on the rise, and Canada has been left vulnerable to America’s coercive trade policies. However, when it...

edit post
Do I Need to Adjust ESPP Cost Basis from Form 1099-B?

Do I Need to Adjust ESPP Cost Basis from Form 1099-B?

by TheAdviserMagazine
October 2, 2025
0

At a glance: Stock options and ESPP plans generate income in two categories: ordinary income and capital gains or losses....

edit post
Why the Stakes are Higher for I 9 Form 2025 Audits

Why the Stakes are Higher for I 9 Form 2025 Audits

by TheAdviserMagazine
October 2, 2025
0

On March 6, 2025, our firm posted a blog about the basics of I-9 completion ensuring that employers are complying...

edit post
How to Create a Legacy Plan for Real Estate Investors |

How to Create a Legacy Plan for Real Estate Investors |

by TheAdviserMagazine
October 2, 2025
0

When most people hear the words estate planning or legacy plan, they think about wills, probate court, and taxes. But...

edit post
What’s New at Canopy: Fall 2025

What’s New at Canopy: Fall 2025

by TheAdviserMagazine
October 2, 2025
0

The Past 6 Months Over the past six months, we’ve been focused on unclunking firm workflows, simplifying client engagement, and...

edit post
2026 Tax Calculator | One Big Beautiful Bill Tax Calculator

2026 Tax Calculator | One Big Beautiful Bill Tax Calculator

by TheAdviserMagazine
October 1, 2025
0

This summer, Congress passed the One Big Beautiful Bill Act (OBBBA) into law, which made the largest set of federal...

Next Post
edit post
Activist Fivespan has a stake in Qiagen. Three levers to boost growth

Activist Fivespan has a stake in Qiagen. Three levers to boost growth

edit post
‘Trade should not be a weapon’

'Trade should not be a weapon'

  • Trending
  • Comments
  • Latest
edit post
What Happens If a Spouse Dies Without a Will in North Carolina?

What Happens If a Spouse Dies Without a Will in North Carolina?

September 14, 2025
edit post
California May Reimplement Mask Mandates

California May Reimplement Mask Mandates

September 5, 2025
edit post
Does a Will Need to Be Notarized in North Carolina?

Does a Will Need to Be Notarized in North Carolina?

September 8, 2025
edit post
DACA recipients no longer eligible for Marketplace health insurance and subsidies

DACA recipients no longer eligible for Marketplace health insurance and subsidies

September 11, 2025
edit post
‘Quiet luxury’ is coming for the housing market, The Corcoran Group CEO says. It’s not just the Hamptons, Aspen, and Miami anymore

‘Quiet luxury’ is coming for the housing market, The Corcoran Group CEO says. It’s not just the Hamptons, Aspen, and Miami anymore

September 9, 2025
edit post
Tips to Apply for Mental Health SSDI Without Therapy

Tips to Apply for Mental Health SSDI Without Therapy

September 19, 2025
edit post
Activist Irenic builds a stake in Workiva, hoping to gain two board seats

Activist Irenic builds a stake in Workiva, hoping to gain two board seats

0
edit post
Henry Moon Pie: Time to Support a Reader-Supporting Site

Henry Moon Pie: Time to Support a Reader-Supporting Site

0
edit post
World Liberty Financial sells tokens to Hut8 for treasury reserves at alt=

World Liberty Financial sells tokens to Hut8 for treasury reserves at $0.25 each

0
edit post
Indonesia school collapse death toll rises to 17, dozens still missing

Indonesia school collapse death toll rises to 17, dozens still missing

0
edit post
The Secret Upside of No Kids or Grandkids Nearby

The Secret Upside of No Kids or Grandkids Nearby

0
edit post
The U.S. is about to hold the government’s biggest coal sales in over a decade even as demand wanes

The U.S. is about to hold the government’s biggest coal sales in over a decade even as demand wanes

0
edit post
Henry Moon Pie: Time to Support a Reader-Supporting Site

Henry Moon Pie: Time to Support a Reader-Supporting Site

October 4, 2025
edit post
The U.S. is about to hold the government’s biggest coal sales in over a decade even as demand wanes

The U.S. is about to hold the government’s biggest coal sales in over a decade even as demand wanes

October 4, 2025
edit post
Dow Jones Futures: Rally At Highs With Nvidia A Buy, Palantir A Sell; Big Tesla News Due

Dow Jones Futures: Rally At Highs With Nvidia A Buy, Palantir A Sell; Big Tesla News Due

October 4, 2025
edit post
Indonesia school collapse death toll rises to 17, dozens still missing

Indonesia school collapse death toll rises to 17, dozens still missing

October 4, 2025
edit post
What One Big Move Can Do to Lower Your Monthly Cost of Living

What One Big Move Can Do to Lower Your Monthly Cost of Living

October 4, 2025
edit post
Activist Irenic builds a stake in Workiva, hoping to gain two board seats

Activist Irenic builds a stake in Workiva, hoping to gain two board seats

October 4, 2025
The Adviser Magazine

The first and only national digital and print magazine that connects individuals, families, and businesses to Fee-Only financial advisers, accountants, attorneys and college guidance counselors.

CATEGORIES

  • 401k Plans
  • Business
  • College
  • Cryptocurrency
  • Economy
  • Estate Plans
  • Financial Planning
  • Investing
  • IRS & Taxes
  • Legal
  • Market Analysis
  • Markets
  • Medicare
  • Money
  • Personal Finance
  • Social Security
  • Startups
  • Stock Market
  • Trading

LATEST UPDATES

  • Henry Moon Pie: Time to Support a Reader-Supporting Site
  • The U.S. is about to hold the government’s biggest coal sales in over a decade even as demand wanes
  • Dow Jones Futures: Rally At Highs With Nvidia A Buy, Palantir A Sell; Big Tesla News Due
  • Our Great Privacy Policy
  • Terms of Use, Legal Notices & Disclosures
  • Contact us
  • About Us

© Copyright 2024 All Rights Reserved
See articles for original source and related links to external sites.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In
No Result
View All Result
  • Home
  • Financial Planning
    • Financial Planning
    • Personal Finance
  • Market Research
    • Business
    • Investing
    • Money
    • Economy
    • Markets
    • Stocks
    • Trading
  • 401k Plans
  • College
  • IRS & Taxes
  • Estate Plans
  • Social Security
  • Medicare
  • Legal

© Copyright 2024 All Rights Reserved
See articles for original source and related links to external sites.