Can tax penalties be abated for anxiety and depression due to the death of a spouse to cancer and the September 11, 2001 terrorist attacks on the World Trade Center? The court addressed this in Kwosh v. Commissioner, T.C. Memo. 2008-204, in light of the 10 percent addition to tax on early retirement distributions and failure to file and pay penalties.
The Facts & Procedural History
Mr. Kwosh’s wife died an untimely death from thyroid cancer at age 53 in June 2001, leaving Mr. Kwosh responsible for her aged mother and his two teenage children.
Mr. Kwosh lost a number of friends and neighbors in the September 11 terrorist attacks on the World Trade Center, including three or four people who had attended his wife’s funeral.
By February 2002, petitioner’s depression from his wife’s death and the September 11 attacks became so severe that the taxpayer could no longer go to work.
Mr. Kwosh sought assistance from his employer’s employee assistance program for his depression. Mr. Kwosh was prescribed medication for depression and anxiety attacks.
Mr. Kwosh did what many taxpayers do when they suffer a financial hardship. He took money out of his retirement account to live off of. The IRS assessed penalties, which resulted in this court case.
Request to Remove Penalties
The questions for the court were whether Mr. Kwosh’s depression caused by his wife’s untimely death at age 53 and the September 11, 2001 terrorist attacks on the World Trade Center:
- Qualifies as a disability for purposes of the 10-percent additional tax on his pension distribution under Section 72(t) and
- Reasonable cause for his failure to file a timely return, timely pay taxes, and pay estimated tax.
These questions depend on whether the facts qualify.
Section 72(t) – Exception to the 10% Tax
Section 72(t) imposes a 10 percent additional tax on the early distributions.
There are a number of exceptions to this additional 10 percent tax. Being disabled is one such exception. The rule says that a taxpayer is disabled if he or she “is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration.” To meet this exception, Mr. Kwosh must provide written proof from a qualified medical professional or at least testimony from such a professional.
Mr. Kwosh argued that the depression he suffered due to his wife’s early death and the September 11 attacks caused him to be totally “disabled.” Unfortunately, he did not present any documentary evidence to corroborate his depression or anxiety, however. In addition, no doctors testified nor did taxpayer provide any affidavits from medical professionals.
Late Filing & Payment Penalties
In addition to the Section 72(t) addition to tax, Mr. Kwosh also incurred penalties for not timely filing or paying his taxes. These penalties can be abated if Mr. Kwosh can establish that he acted with reasonable cause. To qualify, Mr. Kwosh must show that he or she exercised ordinary business care and prudence but was nevertheless unable to file the return or pay within the prescribed time. An illness or incapacity that prevents Mr. Kwosh from filing his or her return can be reasonable cause.
Mr. Kwosh argued that his depression and sleep apnea constitute reasonable cause. As with the Section 72(t) addition to tax, the court noted that Mr. Kwosh did not present any evidence from a medical professional to establish that an illness or incapacity that prevented him from filing his return or paying his taxes. The court even noted that the failure to pay continued on for a prolonged period of time.
Nope, Not Given the Facts in This Case
The court concluded that Mr. Kwosh’s depression did not qualify as a disability under Section 72(t) or as reasonable cause for purposes of the failure to file penalty, failure to pay penalty, or the estimated tax penalty.
It should be noted that it does not appear that Mr. Kwosh argued that the lack of records or ability to locate records or making filings was due to his wife’s demise or the September 11 terrorist attacks. It seems that the time and effort to care for his wife in her final days or even the inability to make filings given the events surrounding September 11th and that he worked and lived in the area of the attacks may have qualified, if that was actually true.