Question of material fact existed for untimely filed tax return

The Fifth Circuit held that a district court improperly granted summary judgment in favor of the IRS when the lower court held the taxpayers’ reliance on an agent to electronically file their tax return was not reasonable cause to avoid the late-filing penalty of Sec. 6651(a)(1). According to the court, whether the paid preparer was negligent was an issue of material fact that should have been determined before deciding the issue; therefore, the court vacated the decision and remanded the case to the lower court.

Facts: Christopher and Priscilla Haynes hired John Dunbar, a CPA, to prepare their 2010 income tax return. Dunbar electronically filed their return on Oct. 17, 2011, the last day of the automatic six-month extension period, and on the same day informed the couple of the filing. Dunbar electronically sent the return to Lacerte Software Corp., which timely transmitted it to the IRS. The IRS rejected the return because Priscilla Haynes’s Social Security number appeared on an incorrect line; however, Dunbar did not receive a rejection notice. In addition, the Hayneses were not aware of the rejection until they received an overdue-return notice from the IRS on Aug. 20, 2012. Prior to that date, they had not received a rejection notice from the IRS, Lacerte, or Dunbar.

The Hayneses immediately filed a paper return, and upon its receipt, the IRS assessed a penalty. The taxpayers paid the penalty, requested an abatement of it, and then sued for a refund in district court under Sec. 6651(a)(1) after the IRS denied the abatement request. The court denied the refund request and granted the IRS’s motion for summary judgment on the basis that the Hayneses’ reliance on Dunbar to timely file their return did not constitute reasonable cause (Haynes, No. EP-16-CV-112-KC (W.D. Tex. 6/15/17)). The taxpayers appealed the decision to the Fifth Circuit.

Issues: Sec. 6651(a)(1) permits the IRS to assess a penalty for a taxpayer’s failure to file a timely tax return unless the failure is due to reasonable cause and not due to willful neglect. To demonstrate a lack of willful neglect, the taxpayer must show the late filing was not due to carelessness, reckless indifference, or an intentional failure. To show that the late filing was due to reasonable cause, the taxpayer must provide evidence that he or she exercised ordinary business care and prudence but was unable to file the return on time. In Boyle, 469 U.S. 241 (1985), a case involving the filing of a paper return, the Supreme Court held that reliance on an agent such as an accountant or attorney to file a tax return cannot constitute reasonable cause for an untimely tax return and stated, “It requires no special training or effort on the taxpayer’s part to ascertain a deadline and ensure that it is met.”

The taxpayers argued that filing an electronic return is fundamentally different from mailing a paper return because it requires special software, and, therefore, the Boyle standard is not automatically applicable to an electronic return.

Holding: The Fifth Circuit vacated the lower court’s decision and remanded the case to it, holding that the lower court erred when it granted summary judgment in favor of the IRS because there was a genuine dispute of material fact. Specifically, according to the court, a determination was required of whether Dunbar had met the reasonable-cause standard by exercising ordinary business care and prudence after he had not received either an acceptance or rejection notice from the IRS. If he did, the court explained, because Dunbar was the Hayneses’ agent, it must find that the Hayneses met the reasonable-cause standard — barring any determination of independent negligence by them. This was the case because, as the court stated, “[a]fter all, principals are not only bound by their agents’ failures, as in Boyle, but also by their diligence.” The court determined it would only need to decide whether the Boyle standard should apply to electronically filed tax returns if Dunbar were found to have acted negligently.

• Haynes, No. 17-50816 (5th Cir. 1/29/19)

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