This article analyzes the Tax Court’s Memorandum Opinion in Dealers Auto Auction of Southwest LLC v. Commissioner, T.C. Memo. 2025-38, filed April 28, 2025. This case provides valuable insights for tax practitioners regarding the application of the reasonable cause defense to penalties for failure to file information returns under Internal Revenue Code (I.R.C.) § 6050I and the relevance of reliance on software in establishing such a defense.

I. Facts of the Case

Dealers Auto Auction of Southwest, LLC (Dealers Auto), an Arizona limited liability company operating an auction house in Phoenix, Arizona, regularly received cash payments exceeding $10,000 for vehicle purchases, triggering the information reporting requirements of I.R.C. § 6050I. Specifically, Dealers Auto was aware of its obligation to file Form 8300, "Report of Cash Payments Over $10,000 Received in a Trade or Business," and had filed these returns in the past.

Notably, Dealers Auto had a history of noncompliance with these reporting obligations, having failed to file and furnish required information returns in 2014. This prior failure resulted in proposed penalties under I.R.C. §§ 6721 and 6722 totaling $21,200.

Following the 2014 failures, Dealers Auto purchased AuctionMaster software from Integrated Auction Solutions (IAS) to assist with its reporting requirements, including the preparation of Forms 8300. While the record did not definitively show that Dealers Auto purchased the specific Form 8300 module, the court inferred that it was included. Promotional materials for AuctionMaster claimed IRS approval, and the user manual indicated the software could track cash payments and print Form 8300 upon request, integrating with a "Counter Checkout utility" that prompted users for required information. The manual did not state that the software automatically filed the forms.

For the 2016 tax year, the Commissioner determined that Dealers Auto failed to meet its I.R.C. § 6050I filing obligations. While Dealers Auto’s new system generated 116 Forms 8300, the Commissioner determined that an additional 266 Forms 8300 should have been filed. This resulted in proposed penalties totaling $118,140 for various failures, including late filings and delinquent notifications. The specific cause of these failures was unclear, with Dealers Auto’s brief suggesting a potential "failure with the computer system". The record lacked evidence regarding the accuracy of data input, whether the software was intended to file automatically, or the steps Dealers Auto took to verify the software’s functionality.

Dealers Auto became aware of these failures during a Commissioner examination and subsequently contacted IAS, learning of improvements made to the Form 8300 module in a June 30, 2017 update. Dealers Auto also consulted with the examining agent to clarify its filing obligations and implemented internal controls and procedures for filing Forms 8300 electronically.

II. Taxpayer’s Request for Relief

In the ensuing collection proceeding, Dealers Auto challenged its underlying liability for the penalties, specifically seeking a reasonable cause penalty abatement concerning the Form 8300 penalties. Dealers Auto argued that its failure was due to reliance on the IAS AuctionMaster software, which it claimed did not perform as intended. The Appeals officer considered this argument but sustained the lien, stating that reliance on software is insufficient without proper checks and balances. Dealers Auto then petitioned the Tax Court, challenging only its underlying liability for the penalties.

III. Court’s Analysis of the Law

A. Jurisdiction and Standard of Review

The Tax Court noted its limited jurisdiction, which it can exercise only to the extent authorized by Congress, citing Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The court has exclusive jurisdiction to review appeals from the Commissioner’s lien and levy determinations, regardless of the underlying liability, as stated in Ginsberg v. Commissioner, 130 T.C. 88, 92 (2008). The standard of review in collection cases regarding underlying liability is de novo, as established in Mason v. Commissioner, 132 T.C. 301, 316 (2009), and Sego v. Commissioner, 114 T.C. 604, 610 (2000). Since Dealers Auto did not have a prior opportunity for administrative appeal of the penalties, the court would review the underlying liability de novo.

B. Burden of Production

The court clarified that, under I.R.C. § 7491(c), the Commissioner generally bears the burden of production for penalties with respect to individual taxpayers. However, citing NT, Inc. v. Commissioner, 126 T.C. 191, 195 (2006), and Dynamo Holdings Ltd. Partnership v. Commissioner, 150 T.C. 224, 234 (2018), the court stated that this burden does not apply to corporations or partnerships. As Dealers Auto is a limited liability company, it bears the burden of production with respect to the penalties at issue.

C. Information Return Filing Obligation and Penalties

The court outlined the requirements of I.R.C. § 6050I(a), which mandates the filing of an information return for cash transactions exceeding $10,000 in a trade or business, and I.R.C. § 6050I(e)(1), which requires furnishing a statement to the payor. The penalties for failure to file under I.R.C. § 6721(a)(1) and failure to furnish under I.R.C. § 6722(a) were noted as $250 per failure, subject to limitations and inflation adjustments.

D. Reasonable Cause

The court addressed the reasonable cause exception under I.R.C. § 6724(a), which states that penalties do not apply if the failure is due to reasonable cause and not willful neglect. Citing Treasury Regulation § 301.6724-1(a)(2), the court explained that reasonable cause exists if there are significant mitigating factors or the failure arose from events beyond the filer’s control, provided the filer acted in a responsible manner before and after the failure. The court determined that Dealers Auto did not meet the criteria for significant mitigating factors under Treas. Reg. § 301.6724-1(b) because it had previously filed these forms and had prior failures.

Regarding events beyond the filer’s control, as outlined in Treas. Reg. § 301.6724-1(c)(1), the court acknowledged that while the list is not exhaustive, it includes certain technological failures, such as issues with magnetic media filing. The court noted the Commissioner’s internal guidance in the Internal Revenue Manual 20.1.7.12.1(24) (Dec. 16, 2022), which recognizes reliance on an internal computer system with major hardware or software problems as a potential failure beyond the filer’s control.

The court then considered Dealers Auto’s argument of reliance on software malfunction. It distinguished this case from accuracy-related penalties, where reliance on software may be viewed differently, citing Bunney v. Commissioner, 114 T.C. 259, 267 (2000) ("Tax preparation software is only as good as the information one inputs into it") and Dasent v. Commissioner, T.C. Memo. 2018-202, at *23 (software does not constitute professional advice). However, the court also noted Morales v. Commissioner, T.C. Memo. 2012-341, at *7 n.2, aff’d, 633 F. App’x 884 (9th Cir. 2015), which suggested that reliance on tax preparation software might be reasonable with evidence of a programming or instructional error. The court concluded that a software malfunction could qualify as a failure beyond the filer’s control if the filer used the software correctly.

E. Non delegation Doctrine

The Commissioner argued that the duty to file information returns is nondelegable, citing United States v. Boyle, 469 U.S. 241 (1985). In Boyle, the Supreme Court held that reliance on an agent to make a timely filing is not reasonable cause for late filing under I.R.C. § 6651(a)(1). However, the Tax Court distinguished Boyle, noting that Dealers Auto was not arguing that it delegated the obligation to file to the software, but rather that the software malfunctioned by failing to notify it of the filing requirement. The court stated that Boyle does not preclude reasonable cause when a filer is misadvised about the need to file.

IV. Application of the Law to the Facts

The court ultimately found that Dealers Auto failed to establish reasonable cause for two primary reasons:

Failure to Establish Software Failure: Dealers Auto did not provide sufficient evidence to demonstrate that the software failed to perform as intended. The record was unclear whether the alleged failure was in creating the forms or in filing them. Communications with IAS referred to "improved" features, not existing malfunctions.
Failure to Establish Responsible Behavior: Dealers Auto did not demonstrate that it acted responsibly before or after the failure. There was no evidence regarding the correct installation, training, or use of the software, or whether the data input was accurate. Furthermore, the significant reduction in the number of Forms 8300 generated in 2016 compared to 2014 (116 versus at least 212) should have alerted Dealers Auto to a potential issue, yet no explanation was provided for why this reduction appeared reasonable. The court concluded that Dealers Auto did not take reasonable steps to foster compliance or verify the software’s intended function.

V. Court’s Conclusions

Based on the lack of evidence establishing a software malfunction and the failure to demonstrate responsible behavior before and after the alleged failure, the Tax Court held that Dealers Auto failed to establish reasonable cause for its failure to file information returns for 2016. Consequently, the court stated that a decision would be entered for the Commissioner.

Implications for Tax Practitioners

This case underscores several critical points for CPAs advising clients on information reporting obligations:

Burden of Proof: Taxpayers, especially entities, bear the burden of proving reasonable cause for penalty abatement.
Reliance on Technology: While reliance on software can potentially form the basis of a reasonable cause defense in information return penalty cases, taxpayers must demonstrate that the software was used correctly and that the failure was due to an unforeseen malfunction.
Due Diligence: Taxpayers must exercise due diligence in ensuring compliance, including proper setup, training on software, accurate data input, and verification of the software’s output and filing processes. A significant deviation from prior reporting patterns should trigger further investigation.
Internal Controls: Implementing and maintaining adequate internal controls to identify potential compliance issues is crucial for demonstrating responsible behavior.
Documentation: Maintaining thorough documentation regarding software implementation, training, usage, and any communication with software providers regarding issues is essential for substantiating a reasonable cause defense.

This ruling serves as a reminder that the mere purchase and use of software do not automatically absolve taxpayers of their information reporting responsibilities. Taxpayers must actively engage in the compliance process and take reasonable steps to ensure the accurate and timely filing of required information returns.

Prepared with assistance from NotebookLM.