A married couple filed their Form 1040 on a timely basis. Or, so they thought. In the Tax Court case of Reifler (B.C. Reifler, TC Memo. 2015-199, Dec. 60,425(M)), the couple was found to have failed to timely file a valid joint tax return for the year at issue because the return they filed omitted the wife’s signature.
We find this case of interest for two reasons. First, it illustrates why applying logic often does not work when dealing with the IRS. There are some taxpayers who pooh-pooh IRS rules and tell us that if the IRS audits them, they will logically explain to the IRS their situation and why their less than stellar substantiation should be accepted and all will be well. Second, it illustrates that when taxpayers deal directly with the IRS, on even the most simple of issues, they would be better served using an experienced tax professional.
The Reifler case illustrates why relying upon taxpayer logic is flawed. Upon receipt of the Reifler’s tax return, the IRS returned it to the Reiflers due to the missing signature. What did the Reiflers do? Nothing. They simply ignored the return of their tax return. Later when the couple received a return delinquency notice from the IRS, both spouses signed their original return and mailed it to the IRS. The couple did not include any correspondence with the second mailing explaining what had happened. Upon receipt of the second mailing, the IRS treated the “second” return as the taxpayers’ original return for the year at issue. The IRS eventually assessed the couple late filing penalties. The couple opposed the imposition of the penalties as they logically thought that the IRS should have accepted their first filing which brings this case to the Tax Court.
The taxpayers argued that their original return should have been accepted as a valid filing under the substantial compliance doctrine. However, the lack of a signature is fatal to finding a return valid under the Beard test. Although the substantial compliance doctrine allows one to file a return that may contain some inaccuracies and mistakes as long as an honest and reasonable attempt to comply with the tax law requirements has been made, signing a return under penalty of perjury is a separate and distinct requirement that the taxpayers failed to satisfy. The taxpayers also argued that they relied upon the tacit consent doctrine (where one spouse signs for the other) to substantiate the validity of their original return. That argument was rejected as that doctrine is generally used in cases where one spouse signs a joint return for both spouses and is later shown that the other spouse tacitly consented to the joint return filing.
Penalties can sometimes be forgiven if the taxpayer can show reasonable cause (as defined by the IRS). In this case, the facts showed that the taxpayers failed to exercise ordinary business care and prudence and thus were subject to the late filing penalty. Husband was a sophisticated businessman who had filed a joint return with his spouse for many years and had always had both signatures on their returns. He had no reasonable explanation as to why he did not have his wife sign the original return. Furthermore, they failed to make an inquiry as to why their original return was returned to them as they had been filing tax returns for many years and had never previously received back an original return and they mailed. A reasonable person would have inquired why. In addition, the return was sent a second time without any type of explanation attached to the return. Although the taxpayers made a couple of arguments to mitigate the lack of the wife’s signature, they presented no facts that explained why the signature was overlooked.
The Court agreed with the IRS that the taxpayers failed to demonstrate that their failure to timely file the return was due to reasonable cause and not willful neglect.
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