Estate Had Reasonable Cause for Failure to Timely File Estate Tax Return Based on Attorney's Advice (4/6/13)

In Estate of Morton Liftin v. United States, 110 Fed. Cl. 119 (2013), here, the Court of Federal Claims, Judge Miller, held that the estate's failure to timely file the estate tax return because it was waiting for the surviving spouse to obtain citizenship, thus qualifying  bequests to her for the marital deduction, constituted reasonable cause sufficient to prevent the application of the late filing penalty.  Readers who have only a passing familiarity with the Supreme Court's holding in United States v. Boyle, 469 U.S. 241 (1985) may think the holding inconsistent.  It is not, as the Judge Miller explained.  I quote the relevant portion of the opinion (some case, page citations and quotation marks omitted for readability):

To avoid a penalty for a late-filed return, the taxpayer bears the "heavy burden" of proving its failure to file timely was due to reasonable cause and not willful neglect. Boyle, 469 U.S. at 245 (citing I.R.C. § 6651(a)(1)). In order to prove "reasonable cause," a taxpayer must show that it "exercised 'ordinary business care and prudence' but nevertheless was 'unable to file the return within the prescribed time.'" "Willful neglect" requires a "conscious, intentional failure or reckless indifference." 

In Boyle, the Supreme Court observed that "[c]ourts have differed over whether a taxpayer demonstrates 'reasonable cause' when, in reliance on the advice of his accountant or attorney, the taxpayer files a return after the actual due date but within the time the adviser erroneously told him was available." The Court's decision in Boyle did not resolve those differences. The Court did state, however, that: 

When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a "second opinion," or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place. "Ordinary business care and prudence" do not demand such actions. 

By contrast, one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due. In short, tax returns imply deadlines. Reliance by a lay person on a lawyer is of course common; but that reliance cannot function as a substitute for compliance with an unambiguous statute. Among the first duties of the representative of a decedent's estate is to identify and assemble the assets of the decedent and to ascertain tax obligations. Although it is common practice for an executor to engage a professional to prepare and file an estate tax return, a person experienced in business matters can perform that task personally. It is not unknown for an executor to prepare tax returns, take inventories, and carry out other significant steps in the probate of an estate. It is even not uncommon for an executor to conduct probate proceedings without counsel.

First Time Abatement for FTF and FTP Penalties (10/17/12)

TIGTA issued a report on the First Time Abate Penalty waiver of failure to file (FTF) and failure to pay penalties under Section 6651(a)(1) and (2).  TIGTA, Penalty Abatement Procedures Should be Applied Consistently to All Taxpayers and Should Encourage Volulntary Compliance, Treasury Inspector General for Tax Administration (Ref. No. 2012-40-113 9/19/12), here.

The FTF penalty is usually 5 percent of the unpaid taxes for each month or part of a month that a tax return is late.  This penalty will not exceed 25 percent of the unpaid taxes.  If a taxpayer files his or her tax return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.    

If a taxpayer does not pay all taxes owed by the due date, he or she will generally have to pay an FTP penalty of one-half of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid.  This penalty can be as much as 25 percent of the unpaid taxes.  The FTP penalty will continue to accrue after the initial assessment if the taxpayer fails to pay the total tax due when the tax return was due. 

The IRS can abate both penalties under certain circumstances.  Relief from these penalties is generally granted to taxpayers who show they exercised ordinary care and prudence, and failure to file or pay was due to reasonable cause and not due to willful neglect.  However, beginning in Calendar Year 2001, the IRS began granting penalty relief under an Administrative Waiver known as the First-Time Abate (FTA).  Using the FTA waiver, the IRS grants relief to taxpayers who receive an FTF or FTP penalty but have a compliant tax history for the prior three years.  The FTA waiver applies only to a single tax year.

For further background, see IRM 20.1.1.3.6.1  (11-25-2011), titled First Time Abate (FTA), here.