Procrastination Cost Taxpayer $120,627
Kristin Intress and Patrick Steffen (taxpayers) were a married couple who filed a joint return for the 2014 tax year. Taxpayers were out of the country at or around the tax filing deadline for 2014, so they arranged to have their tax return preparer file an extension of time to file their 2014 return. The return preparer, at 7:01 p.m. on April 15, 2015, completed a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, for the taxpayers and queued it up to be filed by her e-file software. However, the preparer failed to hit “send” and the Form 4868 was not electronically received by the IRS by the April 15, 2015, deadline. The tax return preparer did not discover until October 2015 that the extension form had not been filed.
How Expensive Was This Oversight?
As a result, the IRS found that the taxpayers’ return was not filed timely and assessed a $120,607.27 late filing penalty.
IRS Appeals Office agreed with examination’s findings that the Supreme Court Boyle case was controlling. After exhausting their administrative appeals with the IRS, the couple paid the penalty on Nov. 1, 2016. In March 2017, they filed a refund and abatement request. The IRS denied the request.
In Boyle, the Supreme Court held that a taxpayer’s reliance on an agent for tax filing is not reasonable cause for abatement of late penalties should the third party fail to file timely. The Court, citing Regs. Sec. 301.6651-1(c)(1), defined reasonable cause as being “unable to file the return within the prescribed time” notwithstanding the taxpayer’s exercise of “ordinary business care and prudence”. The Court reasoned that the timely filing of required returns is a duty placed on a taxpayer and not on a taxpayer’s agent, and the duty requires no special training or effort on the part of a taxpayer and, accordingly, no assistance from an agent to fulfill. Thus, relying on an agent to file a return is not reasonable.
District Court Findings
The district court found that it could rely upon Boyle because the taxpayers were not required to use tax preparation services. The court observed that, as was the case in 1985, individuals without specialized expertise can still prepare and file their own paper returns, and the decision to use a tax preparation service is within the taxpayer’s control.
Because the same filing options that existed in 1985 (mailing a personally or professionally prepared return) still existed in the year that the taxpayers were audited, the court held that the bright-line rule set out in Boyle had not changed, and, as the Supreme Court stated in its opinion, “reliance [on an agent] cannot function as a substitute for compliance with an unambiguous statute”.
Accordingly, the district court held that the taxpayers were not entitled to an abatement of the penalty. The court concluded that although the IRS relied upon the Boyle case, which was decided at a time when returns were exclusively paper-filed, the holding in that case also applies to e-filed returns.
Reasonableness Outside the Context of Boyle
The court further found that even if Boyle did not apply to e-filed returns, it would not eliminate a taxpayer’s duty to exercise “ordinary business care and prudence.” Therefore, if Boyle did not apply, the court stated, a taxpayer that claimed reliance on an agent as reasonable cause for late filing would still be required to prove that the reliance was reasonable. According to the court, “it would never be reasonable to blindly take someone’s word that he will timely file your taxes”. Thus, because it was unclear that the taxpayers had tried to verify that their tax return preparer had properly filed an extension for their return before the mistake was discovered six months after the extension was supposedly filed, the court determined that the taxpayers’ reliance on their tax return preparer was not reasonable.
We wish to acknowledge that this case was brought to our attention by James Beavers in his October 1, 2019 article in the AICPA’s “The Tax Adviser” publication.
Tax Planning Tip #1:
If you use a professional tax preparer, submit your tax information to the preparer as early as possible to minimize your anxiety and to ensure that your tax return is timely filed.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.