A taxpayer was denied relief from late filing penalties when his return, filed via TurboTax, was rejected for an erroneous identification number for a dependent in the case of Spottiswood v. United States, US District Court, ND California, Case No. 3:17-cv-00209. The taxpayer failed to notice an email from TurboTax reporting to him that the return had been rejected, as well as the fact that the $395,619 payment due had not been withdrawn from his bank account. It was not until 18 months later he discovered the rejected return.
The taxpayer, in a statement to the IRS, attempted to argue that he shouldn’t held accountable for his failure to notice this issue. The opinion quotes the statement was follows:
If I had realized that there was a chance of rejection I would have mailed in my return, but e-filing seemed like an easier option and it was free with the software. Intuit may have informed me in the fine print that I needed to log back in to make sure that my return had not been rejected, but if so I did not read this fine print. Had I logged back in a few days later I would have realized that the return had been rejected. But I did not log back in until 18 months later.
The taxpayers failed to notice that the $395,619 payment had not left their account because of the large balances they usually held in such account. Since they filed their California state return in paper form, the state return was not impacted.
The IRS did not agree that the penalties should not apply, so the taxpayers sought relief in court.
The taxpayers attempted to argue both that there was reasonable cause for their failure to timely file and that their attempt to file a return presented the IRS with information that would have been processed on paper, so they shouldn’t be penalized for filing electronically.
The taxpayer conceded there was no reasonable cause for late payment (apparently agreeing that failing not notice nearly $400,000 extra in their account was not really excusable), but argued they should still be found to have reasonable cause for late filing. The District Court did not agree. As the opinion states:
The IRS rejected Plaintiffs’ return the same day they attempted to file it, and TurboTax informed Plaintiffs of this fact on or about the same day — April 12, 2013. It is undisputed that Plaintiffs did not use the “check e-file status” TurboTax screen to confirm the IRS had accepted their return, and did not check the email account Spottiswood provided to TurboTax for the purpose of communicating with him about his tax return. Plaintiffs do not identify any facts showing they could not have done so. Under these circumstances, the Court cannot find that Plaintiffs have created a triable issue that there was reasonable cause for their failure to timely file their taxes. See Boyle, 469 U.S. at 245.
But the taxpayers argued that, nevertheless, they should be found to have submitted a qualified return. Citing the Tax Court’s 1984 Beard opinion (82 T.C. 766, 777) the taxpayers argued their attempted submission met the criteria that was used to determine if a document purporting to be a tax return was sufficient for statute of limitation purposes, namely:
- The document is sufficient to calculate the tax liability;
- The document purports to be a return;
- The document evinces an honest and reasonable attempt to satisfy the requirements of tax law; and
- The document is executed by the taxpayer under penalty of perjury.
The court did not agree that this test meant their attempt to efile was sufficient to avoid a late filing penalty. The taxpayers argued the IRS would have accepted and processed their return had it been filed on paper.
However, the Court found their evidence for that assertion to be wanting:
Plaintiffs argue that the IRS would have accepted a paper-filed return containing the same error, and that the IRS unlawfully applied a more stringent standard to their electronically-submitted return. Pls.’ Mem. at 7-8. Plaintiffs’ only support for this argument is a document entitled “Internal Revenue Manual Part 3. Submission Processing Chapter 11. Returns and Documents Analysis Section 3. Individual Income Tax Returns.” See Pls.’ Opp’n at 1 (“Plaintiffs submit Exhibits 1 through 3”); id., Ex. 2. This document is not authenticated, and Plaintiffs establish no foundation for the document. The document shows a transmittal date of November 17, 2017, and Plaintiffs do not establish any foundation showing the IRS followed the procedures described therein when Plaintiffs attempted to submit their tax return more than four years prior to that date. Plaintiffs also establish no foundation to show their interpretation of the procedures described in the document is correct. Plaintiffs fail to create a triable issue that the same mistake contained in their submission would have been treated differently if it had been presented as a paper filing, and that the IRS’ rejection of their submission because it contained an erroneous Social Security number was not lawful.
The IRS rejected their filing because it contained an error; the IRS thus could not calculate Plaintiffs’ tax liability. Plaintiffs fail to create a triable issue that they timely filed their 2012 tax return.