Electronic filing of tax returns is a very different process from mailing in a tax return. But in the case of Haynes v. United States, 119 A.F.T.R.2d 2017-2202 the Federal District Court for the Western District of Texas applied the Supreme Court ruling in United States v. Boyle, 469 U.S. 241, 245 (1985) to deny relief from late filing penalty to a taxpayer who had been told by his tax preparer that his electronically filed return had been accepted—but it hadn’t.
The Fifth Circuit Court of Appeals reversed that decision in this case, but did so based on a rationale that, at least for now, did not require the appellate panel to determine if Boyle should still be strictly applied (Haynes v. United States, Case No. 17-50816). The panel decided that, based on the facts, it was not clear if the CPA had been negligent in not determining the return had truly been accepted—and if the CPA was not negligent, neither was the taxpayer, thus creating reasonable cause. So the panel sent the case back to determine if there was such negligence.
The Fifth Circuit panel summarized the facts in this case as follows:
On October 17, 2011, the last day of a six-month filing extension, John Dunbar, a certified public accountant and paid tax preparer, electronically transmitted the Hayneses' Form 1040 income tax return, which he had prepared, to Lacerte Software Corporation for filing with the IRS. Later that day, Dunbar notified Mr. Haynes that the 2010 return had been timely filed. Ten months later, however, on August 20, 2012, the Hayneses received an overdue-return notice from the IRS for the 2010 tax year.
In response to the Hayneses’ resulting inquiry, Dunbar ultimately determined that, on October 17, 2011, Lacerte accepted the electronically submitted return and timely transmitted it to the IRS. Nevertheless, the IRS rejected the return because Ms. Haynes's Social Security Number erroneously appeared on the line designated for an employment-identification number. For reasons unknown, the Hayneses did not receive a rejection notice from the IRS, Dunbar, or Lacerte prior to the August 2012 notice of nonpayment.
In Boyle the U.S. Supreme Court found that a taxpayer’s reliance on a tax professional to file a return cannot, standing alone, qualify as reasonable cause for avoiding the failure to file penalty. But in Boyle the situation involved sending the return in via the U.S. Postal Service. The taxpayers argued that, given the unique circumstances of electronic filing, Boyle is no longer applicable.
The logic makes sense—while the taxpayer easily could have obtained the document and mailed it, which would have assured the timely filing, the taxpayer does not reasonably have the same option to file a return with the IRS except via some third party (a tax preparer, a software company or, as in this case, both).
But the Fifth Circuit held that, even if reliance on the CPA to file the return wasn’t reasonable even under electronic filing (and the panel took no position on that at this time), if the agent’s actions weren’t negligent then reasonable cause could still exist.
And the panel found that whether or not the CPA (Dunbar) was negligent is not clear from the record of the case:
Whether it was reasonable for Dunbar to assume, based on the IRS's silence, that it had accepted the Hayneses’ return or whether ordinary business care and prudence would demand that he personally contact the IRS to ensure acceptance is a genuine question of material fact for the jury to decide. Because Dunbar is the Hayneses' agent, if a jury determines that his actions meet the reasonable-cause standard, it must find the same to be true for the Hayneses — barring any determination of independent negligence by them. After all, principals are not only bound by their agents' failures, as in Boyle, but also by their diligence.
The case raises a point advisers should consider—what are your procedures for verifying that a return was truly accepted by the IRS. Normally there are two separate acceptance issues—whether the software vendor’s scan of the return after it transmitted to them to send to the IRS shows any issues prior to transmission to the IRS, and then whether the return is ultimately accepted by all taxing agencies. As well, during return preparation the prepare normally also has a series of checks performed prior to transmission to the software vendor by local software to determine a return’s ability to be efiled.
The facts don’t make it clear if some departure from Intuit’s normal procedures caused this issue to fall between the cracks (they failed to issue a notice back that the return was rejecte) or whether the issue was the CPA’s failure to confirm the status of the return.