Failure to File Penalty When Return Not Filed-What is Reasonable Cause to Avoid the Penalty? (11/24/23)

In Lee v. United States, 84 F.4^th 1271, (11^th Cir. 8/24/23) (GS here), the Court held that reliance upon a return preparer to e-file a tax return is not reasonable cause for the failure to file penalty. This is a logical and probably necessary holding from Boyle’s bright line holding for those penalties applying for failure to file and pay by mail. United States v. Boyle, 469 U.S. 241 (1985), here.

Lee serves as a reminder that taxpayers assume the risk of their preparer’s failure to file (whether in hard copy format or by e-file). Of course the taxpayer has to sign the hard copy manually and should be able to know at least whether that essential act was done in time. So, if signing the return occurs in time, the taxpayer should simply mail the return in one of the § 7502 guaranteed timely mailed, timely filed way.

In this regard, readers may want to review Judge Lagoa’s “specially concurring” opinion warning of the risks in this process for manually mailed and efiled returns.

I posit one hypothetical as a possible reasonable cause defense for failure to file timely. Assume an individual taxpayer with an extended filing date of 10/15/XX. He engages with a competent preparer to whom he timely delivers all documents and data required to prepare the return and offer it to the taxpayer for filing and mailing in early October. The expectation is that the taxpayer will do the guaranteed timely mailing-timely filing method under § 7502. During the preparation phase, the taxpayer and the preparer correspond as necessary to make sure the preparer has the information sufficiently to prepare the return competently and timely and is progressing in a timely manner to meet the early October time to deliver to the client for filing. On October 13/XX, the taxpayer goes to the preparer’s office to sign, physically signs, and takes possession of the return, bringing a properly addressed envelope with a postage-paid envelope for one of the guaranteed timely mailing -timely filing methods. The taxpayer finds at the preparers office that for some reason the return has not been prepared and the underlying documents and data are in such a mess that the mess cannot be resolved in time to file the return timely. Would that be reasonable cause? Surely this is a different case than Boyle where the problem resulted from the adviser giving incorrect legal advice as to the filing date so that, apparently no attempt was made to prepare a return in time for timely filing. Also, assume that the failure to file penalty is $1,000,000. Would you take the case on a contingency fee?

Of course, taxpayers who can prove that they reasonably relied upon the preparer under state law have a likely cause of action under state law. But pursuing that right might be expensive, timely, and perhaps fruitless.

Estate Did Not Have Reasonable Cause For Failure to Timely File Estate Tax Return (4/11/13)

My immediately preceding blog entry is titled Estate Had Reasonable Cause for Failure to Timely File Estate Tax Return Based on Attorney's Advice (4/6/13), here.  I now present a new decision with the opposite result.  In Knappe v. United States, 713 F.3d 1164 (9th Cir. 2013), here, the executor received erroneous advice from his expert accountant regarding the extended due date for filing the estate tax return.  The case appears closer to the leading decision in the Supreme Court's Boyle case (United States v. Boyle, 469 U.S. 241 (1985)) than the Estate of Liftin decision discussed in the preceding blog.  Hence, in Knappe, the Ninth Circuit applied the Boyle result -- i.e., no relief from the penalties.  Why?

In Knappe, the executor was advised by a tax accountant with whom he had dealt previously that the estate could file for an extension of time to file the estate tax return and pay the tax.  The executor authorized the accountant to file the extension.  The extension requested was for six-months additional time to file the return and one year discretionary additional time to pay.  The IRS granted the extensions as requested -- 6 months and one year respectively.  However, for some reason, the accountant believed he had requested a one-year extension for both.  The return was then filed after the 6-month extended due date but before the one-year period.  The IRS imposed the late filing penalty.

The Ninth Circuit first laid out the Code's background (footnote omitted):

An estate-tax return, Form 706, must be filed within nine months of the decedent's death. 26 U.S.C. § 6075(a); 26 C.F.R. § 20.6075-1. An executor may apply for an automatic six-month extension of time to file Form 706 by filing Form 4768 on or before the due date of the return and checking the appropriate box. 26 C.F.R. § 20.6081-1(b). While the IRS "may grant a reasonable extension of time for filing any return," "no such extension shall be for more than 6 months" except in the case of taxpayers who are abroad. 26 U.S.C. § 6081(a). 

Extensions of the deadline to pay the estate tax operate differently. Treasury Department regulations specify that the IRS may grant an extension of time to pay estate taxes, at the written request of the executor, "for a reasonable period of time, not to exceed 12 months." 26 C.F.R. § 20.6161-1(a)(1).

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.

Reasonable Cause to Avoid Failure to File Civil Penalties (8/25/12)

In my Tax Procedure class, we always study  United States v. Boyle, 469 U.S. 241 (1985), here, which rejected an executor's claim of reliance on an attorney as reasonable cause for late filing of the estate tax.  Most failure to file penalties have relief where the failure is due to reasonable cause and not willful neglect.  Since Boyle, the IRS is trigger happy to assert failure to file penalties upon the mere failure to file.  If reliance on the attorney is not reasonable cause, what is?  Well, at least a coma or other disability.  But, at least in the IRS's imagination, not much else.

Of course, Boyle did involve a commonly filed or at least commonly recognized return -- the estate tax return.  Hence, a reasonably prudent executor might be expected to know or at least inform himself of the filing date for an estate return.  There are any number of less common returns and forms with reasonable cause relief for penalties. Does Boyle command the penalties in those cases upon failure to file?

I have just posted on the Federal Tax Crimes Blog an entry titled Reasonable Cause Defense for Failure to File Form 3520 (8/25/12), here.  The entry discusses a recent decision in a case denying the Government summary judgment in a failure to file Form 3520 reporting transfers to a foreign trust.  The taxpayer in the case argued reasonable reliance on his accountant who allegedly knew all or enough of the facts to have advised the taxpayer and prepared the required Form for timely filing.  Boyle did not warrant summary judgment for for the Government in that case.  The case is proceeding to trial on the factual issue of reasonable cause.

The Federal Tax Crimes Blog entry and the case it discusses are not required reading for my students in the class, but readers of this blog interested in the topic might want to read it.