File now or file later

The U.S. District Court for the District of Massachusetts held that an estate was liable for a late filing penalty since its reliance on an accountant’s advice to file a late estate tax return rather than a timely estimated return was not reasonable cause for filing the return after the due date. That the estate had fully paid its estimated estate tax before an extended payment deadline (but after the original deadline) did not excuse the penalty, the court held. 

A taxpayer who files a delinquent tax return must pay a penalty of 5% of the tax liability per month or portion of a month, up to a maximum of 25%, unless the taxpayer can prove that the failure to file a timely return was due to reasonable cause and not due to willful neglect (Sec. 6651). In Boyle, 469 U.S. 241 (1985), the Supreme Court held that an estate did not have reasonable cause when an attorney it had hired to handle the estate failed to file a timely return. The Court contrasted the facts in Boyle to those in numerous prior cases where taxpayer reliance on an expert’s opinion on a matter of tax law, such as whether a return needed to be filed, was reasonable cause. The Court in Boyle referred to willful neglect as a “conscious, intentional failure or reckless indifference.”

Arthur Young was the executor of his mother’s estate, which was required to file an estate tax return and pay its tax by May 14, 2009. The estate properly extended the tax return’s due date and the tax payment date to Nov. 14, 2009, and May 14, 2010, respectively, and made tax payments of $760,000 on May 14, 2009, and $2.2 million on Aug. 31, 2009. When valuing its assets, the estate obtained real estate appraisals that it believed were much higher than fair market value. After considering an option to file a timely estimated return and later file an amended return after the real estate was sold, the estate’s accountants recommended that the estate should instead file only a late tax return after the sale of the real estate. The accountants thought this approach could simplify a possible future audit and that no late filing penalty would be assessed because the estate had paid an amount ($2,960,000) they believed would be, and ultimately in fact was, greater than its eventual tax liability. The estate followed this advice and filed a late return on Feb. 15, 2010. The IRS assessed a late-filing penalty of $259,326 plus interest of $20,774, since part of the estate tax liability was paid after May 14, 2009, the original filing deadline. The estate filed suit with the district court.

The court stated because the estate paid off its estimated tax liability after the original payment deadline, it was subject to a late filing penalty even though it paid off its liability before the extended payment deadline. Also, according to the court, waiting for more complete information does not give taxpayers reasonable cause to file a late tax return. The estate argued that a desire to avoid or simplify any subsequent audit was reasonable cause for filing a late return. However, the court disagreed, since the estate had followed advice on tax strategy, not tax law. Finally, the court held that the estate’s conscious decision that it would be better to file a late return rather than a timely estimated return constituted willful neglect.

  Estate of Nancy Young, No. 11-11829-RWZ (D. Mass. 12/17/12)

By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota–Duluth.