In the event that a taxpayer is unable to obtain records to comply with tax obligations, they may or may not be subject to penalties. This will depend on whether the taxpayer can establish reasonable cause for not being able to obtain those records.
Reasonable cause may be established if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond his or her control, was unable to comply with the tax obligation.
Establishing Reasonable Cause
When establishing reasonable cause for an inability to obtain records for a tax obligation, the taxpayer will need to explain:
1. Why the records were needed to comply with the tax obligation.
2. Why the records were not available and what steps the taxpayer took to try and secure those records.
3. Why and how the taxpayer became aware that he or she did not have the necessary records.
4. If other means were explored to secure needed information and why this other information was not satisfactory to comply with the tax obligation.
5. Why the taxpayer was unable and did not estimate the information from memory.
6. If the taxpayer had contacted the IRS in the past to find out what they could do about the missing information.
7. If the taxpayer complied once the missing information was received.
This list can be more details and subject to change depending on the circumstances of each and every case. Since each situation is different, it is important to use common sense and your best judgment to determine if you are to be held liable for negligence.