Even Under E-Filing, Taxpayer Cannot Reasonably Rely on Preparer to Escape Late Filing Penalties

The Fifth Circuit in March 2019 raised, but did not answer, the question of whether it was still appropriate to hold that taxpayers could not reasonably rely on a return preparer for timely filing of a return in the age of electronic filing.[1]  A U.S. District in Court in Tennessee decided that, since taxpayers could prepare their own paper return or obtain paper returns from the preparer, the prior rule should continue to apply.[2]  The Court also held that the taxpayer could not seek first-time abatement (FTA) relief in Court—rather, that is fully under the IRS’s control.

The US Supreme Court held in the Boyle case[3] that a taxpayer could not establish reasonable cause for failing to file a tax return by claiming he/she relied upon a tax preparer to timely file the return.  The Court found that the duty required no special knowledge or skill to file a return (a trip to the Post Office or local IRS office) and, as such, could not be delegated to a third party—the taxpayer had a duty to insure the third party actually took the desired action.

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Taxpayer Failed to Read TurboTax Notice of Rejected Return, No Relief Granted for Failure to File Penalty

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reporting to him that the return had been rejected, as well as the fact that the $395,619 payment due had not been withdrawn from his bank account.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.

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Estate Found to Have Reasonably Relied on Attorney's Erroneous Advice for Extended Due Date

Most often taxpayers who attempt to claim reasonable cause for late filing of a return due to reliance on a tax professional don’t succeed in their case.  But the result was different for the taxpayer in the case of Estate of Hake v. United States, No. 1:15-cv-01382, US District Court, MD PA.

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Sixth Circuit Agrees That Attorney's Failures Did Not Excuse Estate From Being Penalized for Late Filing

In early 2015, we wrote a post in this blog regarding the case of Specht v. Commissioner and the executor's argument that the estate had reasonable cause for late filing of its estate tax return due to failures of the estate's legal counsel to perform her duties, along with statements the attorney made to mislead the executor regarding her failures to perform those duties.

The U.S. District Court found in that case that, regardless of the attorney's failures and the executor's lack of sophistication, the executor could not delegate her duty to insure that returns were filed by the due date.  Thus, the Court sustained penalties and interest of nearly $1.2 million against the estate.

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Taxpayer's Dementia Possible Reasonable Cause for Late Filing, But Failure of POA Holder to Act Would Not Be

An IRS memorandum discusses the potential facts that would and would not be relevant in determining if a taxpayer can have failure to file and failure to pay penalties abated for reasonable cause (CCA 201637012).

In this case a taxpayer had appointed a person to act under a durable power of attorney.  She later filed her tax return late for a year, subjecting her to failure to pay and failure to file penalties.  However, the holder of the power of attorney petitioned a state court for appointment of an Emergency Guardian and Conservator for the taxpayer because the power holder believed she suffered from dementia.  A court found that the taxpayer was an “incapacitated person.”

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Taxpayer Had Reasonable Cause for Late Filing and Payment Due to Erroneous Conclusion on Year of Deduction

As we are all aware, the Internal Revenue Code imposes penalties for the late filing of a tax return (IRC §6651(a)(1)) as well as for the late payment of taxes due on a return (IRC §6651(a)(2)).  The penalty does not apply, though, in either case if the failure is due to “reasonable cause and not due to willful neglect.”  In the case of Rogers v. Commissioner; T.C. Memo. 2016-152 the Tax Court found that the taxpayer had such reasonable cause when she mistakenly believed she was not required to file a return, and such a mistaken belief was found to be reasonable in her case.

As the Court notes in this case, “reasonable cause” is inherently very much a facts and circumstances situation and merely believing no return is required to be filed is not sufficient in and of itself—rather, the taxpayer must have arrived at this conclusion via a good faith effort to determine his/her responsibilities under the tax law.  But the taxpayer’s overall situation and their level of sophistication are taken into account to see if the taxpayer’s conduct meets the reasonableness standard.

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Minimum Penalty for Failure to File Returns Increased in Bill Sent to President for Signature

In the Trade Facilitation and Trade Enforcement Act of 2015 (HR 644), passed and sent to the President for signature on February 11, 2016, Congress has raised the minimum penalty amount for the case where a taxpayer fails to timely file certain returns (including income, estate and gift tax returns) within 60 days of the date they are due to $205 or 100% of the tax due (whichever is less).

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Extended Due Date Treated as Transaction Date for Failure to File Penalty, Discharge in Bankruptcy Disallowed

The date of the “transaction” that lead to a failure-to-file penalty under IRC §6651(a)(1) was interpreted differently by the U.S. District Court that heard the appeal than by the original Bankruptcy Court in the case of United States v. Wilson, DC ND Cal., Case No. 3:15-cv-04118 reversing Wilson v. United States, Case No. 14-1106 (Bankr. N.D. Cal).

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Reliance on Adviser by Major League Player to File Returns and Pay Taxes Not Found Reasonable Cause to Waive Penalties

A former major league baseball discovered that certain tax related responsibilities cannot be delegated to paid advisers, as the Sixth Circuit found the taxpayer liable for penalties despite misconduct on behalf of his advisers in the case of Vaughn v. United States, CA6, Case No. 14-3858.

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Estate Never Had Been Given Advice on Due Date, No Reasonable Cause Found for Late Filing

An estate argued that it should be excused from late filing penalties because it had relied on the advice of an attorney—but the court in the case of West, et al v. Koskinen, 2015 TNT 203-11 (USDC Eastern District Virginia) determined that, in fact, there had been no advice received from the attorney on this matter.

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Attorney's Malpractice in Misleading Estate Regarding Having Filed for an Extension Was Not Reasonable Cause to Avoid Late Filing Penalty

In the case of the Estate of Escher v. United States (USDC SD Ohio, Case No. 1:13-cv-00705, 2015 TNT 5-12) the issue involved whether a taxpayer should be found to have reasonable cause for the late filing of a tax return if the client’s attorney misled the estate into believing the attorney had filed an extension for filing the return

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