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Osterwijk versus the IRS<\/strong> Background<\/strong><\/p>\n\n\n\n When it came time to file their 2017 Form 1040, the taxpayers expected their longtime preparer to e-file an extension and instruct IRS to apply a payment of about $1.8 million in taxes. The taxpayers made sure they transferred money to their checking account and kept looking to see when the tax payment would hit the account. When the money remained in their checking account past the filing due date, they asked their CPA to double check the status of their payment.<\/p>\n\n\n\n The CPA checks his files and discovers that he failed to file the extension and never instructed the IRS to withdraw the funds to pay for the taxes due.<\/p>\n\n\n\n Failure to File Extension Request Compounded by Poor Tax Advice<\/strong><\/p>\n\n\n\n The preparer advised the Oosterwijks to immediately file a six-month extension request which would allow them to file their return by October 15. The taxpayer followed the advice of their preparer, mailed in the extension request and a check for $1.8 million. <\/p>\n\n\n\n Upon processing their return, IRS assessed failure to pay penalties (FTP) of about $9,000 for the one month non-payment delinquency period. IRS assessed failure to file (FTP) penalties of about $259,000 for the three month late filing period that ran from the April filing due date to June 29th, the date that Oosterwijks\u2019 CPA e-filed their return on their behalf.<\/p>\n\n\n\n These penalty assessments came as a surprise to the Osterwijks and their CPA. Based on the CPA\u2019s advice, the taxpayers had believed that by paying their taxes, submitting the Extension Request in May, and filing the return before October 15, they would halt the accrual of any FTF penalties beyond the first month.<\/p>\n\n\n\n The problem:<\/strong> An extension to file a return must be made on or before the due date, not afterwards.<\/strong><\/p>\n\n\n\n Taxpayer Argues that the Penalty be Abated for Reasonable Cause<\/strong><\/p>\n\n\n\n The taxpayers\u2019 CPA requested penalty relief based on reasonable cause. After all, the taxpayers relied upon the advice of their tax professional. That surely should constitute reasonable cause. The IRS denied the relief.<\/p>\n\n\n\n The CPA appealed administratively on behalf of his clients. The Appeals Officer graciously agreed to abate about 50% of both delinquency penalties. The taxpayers were not happy with the proposed settlement and sent another letter to the IRS raising the issue of reasonable cause due to the failure of their preparer to file the extension and remit the balance due by the April due date of the return.<\/p>\n\n\n\n The taxpayers pay the penalty assessments and sue for a refund claiming that by relying upon the incorrect advice of their tax preparer, they have reasonable cause and the penalties should be abated.<\/p>\n\n\n\n Relying Upon Others to File a Tax Return<\/strong><\/p>\n\n\n\n The courts have consistently held that reliance on a third party to file a return does not establish reasonable cause because \u201c[i]t requires no special training or effort to ascertain a deadline and make sure that it is met.\u201d The court noted that the Oosterwijks were free to paper file an extension, and in fact they eventually did. Furthermore, the court noted that the taxpayer relied upon their adviser’s advice after the due date of the return<\/strong>. The court, in reaching its decision, also noted that a reasonable cause inquiry looks to the due date, and while the due date (and thus inquiry time) could be extended if the taxpayer timely filed an extension, actions beyond the due date are not determinative.<\/p>\n\n\n\n What is the Relevance of the Aforementioned $7.00 Penalty?<\/strong><\/p>\n\n\n\n In cases where a Failure to File (FTF) or Failure to Pay (PTP) penalty is assessed, the IRS provides administrative relief to qualifying taxpayers. That relief is called the First Time Abatement (FTA) Policy. One of the conditions for FTA is that the taxpayer’s compliance for the three prior years were free of penalties. If so, the IRS has the discretion<\/strong> to abate the FTF and FTP penalties. In the instant case, the Oosterwijks incurred a $7.00 penalty during the three-year look back period and thus did not qualify for the FTA relief.<\/p>\n\n\n\n <\/p>\n\n\n\n The authors wish to thank Leslie Book, Professor of Law at Villanova Law School, for his Feb. 7, 2022 blog <\/a>posting of this case. For anyone who wishes to know more about this court case and the court rulings regarding reasonable cause, his article makes for an excellent read.<\/p>\n\n\n\n Tax Tip<\/p>\n\n\n\n Carefully select your tax preparer. Whether they are an attorney, CPA, Enrolled Agent, or an unlicensed tax preparer, a college roommate or a family member, the taxpayer is ultimately responsible for his\/her tax return which is signed under penalties of perjury as being correct. When you are looking for a tax preparer and your first, and perhaps only question is “How much do you charge?”, you are not doing your due diligence in selecting a tax preparer.<\/p>\n\n\n\n <\/p>\n\n\n\n If you would like to discuss your business or personal tax planning<\/a>, tax preparation<\/a> and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601<\/a> today to make an appointment at our Exton PA CPA office<\/a> to discuss your situation. You can also schedule a consultation at Click Here<\/a>. <\/p>\n\n\n\n Copyright \u00a9 2022 Keystone Financial Solutions, Inc. All rights reserved. <\/strong><\/p>\n\n\n\n BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently<\/strong>. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.<\/strong><\/p>\n\n\n\n About F. Bryan Haarlander, EA, CTRS:<\/strong><\/p>\n\n\n\n Bryan\nHaarlander is an IRS licensed Enrolled Agent and who owns and operates a\nspecialized tax services firm serving clients in the western suburbs of\nPhiladelphia, PA, which includes the cities of Chester Springs, Coatesville,\nCollegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia,\nPhoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks,\nChester, Delaware, Montgomery and\nPhiladelphia Counties, as well as clients in Delaware, New Jersey, New York and\nthroughout the continental USA. <\/p>\n\n\n\n
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