Incorrect expert advice about estate return filing deadline does not excuse penalty

BY SALLY P. SCHREIBER, J.D.

An executor of an estate who relied on his accountant’s mistaken advice that he had obtained a one-year extension of the filing due date for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, was nonetheless liable for a large late-filing penalty ( Knappe, No. 10-56904 (9th Cir. 4/4/13)).

Knappe’s accountant believed the estate tax extension form (Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes), which is used to request both an extension to file and an extension to pay, permitted a one-year filing extension and a one-year payment extension, whereas it actually permits a one-year extension to pay the tax and only a six-month filing extension (unless the executor is out of the country).

When the IRS approved the extension request on Jan. 11, 2007, the IRS agent hand-wrote on the Form 4768 “2/28/07” next to the box that the accountant had checked to apply for the filing extension and wrote on another form that the payment extension was until “8/30/2007 only.” Neither the executor not his accountant realized their mistake, so they filed the return on May 29, 2007, both thinking the due date was Aug. 30, 2007. The IRS assessed penalties for late filing, which, since the estate tax was $1.1 million, were significant (the penalty and interest amounted to $185,626.71 by the time the case reached the appeals court).

The executor argued that he had reasonable cause for the late filing because it was reasonable for him to rely on his accountant’s expert advice. By relying on this advice, he had “exercised ordinary business care and prudence.” He also argued that whether his actions were reasonable was a factual issue that could not be determined on summary judgment.

The Ninth Circuit, however, in its decision affirming the district court (No. 2:09-cv-07328-DMG-PJW (C.D. Cal. 10/22/10)), upheld the government’s request for summary judgment that the late-filing penalty applied as a matter of law. Quoting the Supreme Court, this court explained that “[w]hether the elements that constitute ‘reasonable cause’ are present in a given situation is a question of fact, but what elements must be present to constitute ‘reasonable cause’ is a question of law” (quoting Boyle, 469 U.S. 241, 249 n.8 (1985) (emphases in original)).

The court explained that there is a distinction between cases in which a taxpayer relies on the erroneous advice of an expert about when a return is due and cases in which a taxpayer relies on an expert’s erroneous advice about whether a return is due. Because the latter requires advice on a matter of law, it is reasonable for a taxpayer to rely on an expert in that situation. In the other situation, it is not reasonable for a taxpayer to fail to ascertain when a return is due and rely instead on an expert’s opinion. Therefore, the court will distinguish between substantive issues and nonsubstantive issues in determining whether taxpayers may rely on expert advice about filing deadlines. 

The court acknowledged that its holding imposes a heavy burden on executors, who have to ensure that they are receiving the correct advice. Nonetheless, the government’s interest in timely filed returns justifies this burden. A further rationale behind imposing the duty to ensure the advice on filing deadlines they receive is correct is that holding otherwise would encourage collusion between taxpayers and their expert advisers because the advisers would have nothing to lose by lying about the advice they gave taxpayers to avoid any further liability. 

Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.

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