Administrative Law Division Cases Clarify Reasonable Cause

The question of what is and what is not "reasonable cause" in the context of penalty waivers under Alabama Code §40-2A-11(h) was the issue in two recent Administrative Law Division cases. That section permits the Department to waive penalties for reasonable cause, and the taxpayers in both cases felt that they had met that test.

An Honest Mistake

In the first of the two cases, Lance T. and Sherry L. Wilson, INC 03-732, 2/10/04, the taxpayers received a lump sum distribution from a retirement plan in the spring of 2002. Mr. and Mrs. Wilson did not make quarterly estimated tax payments during the remainder of 2002 as required by §40-18-82, and the Department assessed a 10% penalty on the underpayment of tax, plus interest.

At the ALD hearing, Mr. Wilson testified that he had worked as a salaried employee for more than 30 years, and had never been required to pay quarterly estimated taxes. He was not aware of the requirement to do so. Judge Thompson stated that Alabama Revenue Procedure 97-003 established that reasonable cause included, without being limited to, "a non-recurring, honest mistake". Mr. and Mrs. Wilson's failure to pay quarterly taxes was due to such a mistake, in his opinion, and their penalty should be waived for reasonable cause. The interest, however, was required by statute unless there was an unreasonable delay by the Department, which was not a factor in this case. The Wilson's were ordered to pay the interest as charged.

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Illness Is Not Always Enough

In a case heard about three months later, Kevin P. Kazakevich, INC 03-1027, 5/26/04, the taxpayer, a physician, filed his 1999 and 2000 Alabama income tax returns in March of 2003. Both returns reflected a balance due, which Mr. Kazakevich paid with the returns. The Department assessed penalties and interest, and the taxpayer appealed to the Administrative Law Division.

Mr. Kazakevich's attorney cited two factors that made it difficult for Mr. Kazakevich to file his tax returns on time:

The taxpayer's health, and
The fact that his investments were "... so intricately commingled..." with those of his father that it was difficult to separate Mr. Kazakevich's income from his father's.

With regard to his client's health, the attorney stated that Mr. Kazakevich had been suffering from an undiagnosed mental disorder during the years in question. A copy of a letter from the taxpayer's physician was presented, stating that Mr. Kazakevich "... had a serious chronic illness with multiple manifestations, including depression, anxiety, environmental sleep disorder, and exposure to electromagnetic radiation with heavy metal toxicities that have damaged his health profoundly." The letter went on to assert that "...This has certainly affected his ability to manage finances and other elements in his life, though he is capable of handling his own affairs on a day to day basis,..."

Mr. Kazakevich's father had provided "seed money" for the initial purchase of investments, and the income was reinvested in additional investments. Mr. Kazakevich and his father made some investments from the same account. The attorney testified that he had been hired by Kazakevich in late 2003 to help with the tax filings, and it took him "... several months and much work to obtain the necessary records and sort out the mess."

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In his opinion, Administrative Law Judge Bill Thompson observed that this was a difficult case because of Mr. Kazakevich's illness. He also noted however, that the taxpayer was undoubtedly intelligent, since he was a medical doctor. His doctor stated that he was capable of handling his day to day affairs, and he was astute enough to earn more than $220,000 in combined investment income for 1999 and 2000, so "... he also should have been capable of at least hiring someone to timely file his Alabama tax returns in those years."

The ALJ ruled that the 1999 penalties should be waived for reasonable cause as a "first-time mistake"; but the 2000 penalties were upheld.

This page last updated 9/29/04

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