A district court rejected a married couple's claim that they were entitled to a refund and abatement of interest and penalties for late filing of their return because their tax preparer mistakenly failed to transmit their request for a filing extension.
Facts: Kristen Intress and Patrick Steffen hired a professional tax preparer to file their 2014 income tax return. They sought an extension since they were out of the country for the filing deadline. The tax preparer mistakenly failed to hit "send" when submitting a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, request for an extension, and the Form 4868 was not received by the IRS by the April 15, 2015, filing deadline. The filing mistake went undiscovered until October 2015. The IRS assessed penalties and interest under Secs. 6651 (failure to file return or to pay tax) and 6601 (interest for failure to timely pay tax) totaling $120,607. After exhausting all internal appeals, the taxpayers paid the assessment and submitted a request for refund and abatement, which was denied. The couple then filed a refund suit in district court.
Issues: Sec. 6651(a)(1) permits the IRS to assess a penalty for a failure to file a timely tax return unless the failure is due to reasonable cause and not due to willful neglect. Reasonable cause for purposes of this penalty is defined as being "unable to file the return within the prescribed time" despite exercising ordinary business care and prudence, according to the Supreme Court in Boyle, 469 U.S. 241 (1985). In Boyle, the Court held that a taxpayer's reliance on a professional third party who fails to timely file the taxpayer's return is not reasonable cause for abatement of late-filing penalties.
The taxpayers argued, however, that Boyle does not govern electronic returns. The district court noted that the issue of Boyle's applicability to electronic returns is a novel legal question that has not been addressed squarely by the federal courts. Recently, in Haynes, 760 F. App'x 324 (5th Cir. 2019), the Fifth Circuit noted the possibility of an exception to Boyle for e-filed returns but did not address the issue, remanding the case on other grounds (see "Tax Matters: Question of Material Fact Existed for Untimely Filed Tax Return," JofA, May 2019).
The taxpayers noted that Rev. Proc. 2011-25 generally requires preparers filing more than 10 returns a year to do so through e-file software; thus, filing taxes through a tax preparer "now necessarily involves [the] use of specialized software that a taxpayer cannot employ totally independently." This change obligated reliance on their tax return preparer because it put filing of the return beyond their control. The taxpayers, citing the Supreme Court's statement in Boyle that reasonable cause typically involves something "beyond the taxpayer's control," argued that the use of e-file software provided the taxpayers with reasonable cause for not filing their return on time.
Holding: The court dismissed the complaint, holding that Boyle still controlled in this instance. The court found that because the same filing options that existed in 1985, when Boyle was decided (mailing a personally or professionally prepared return) still exist, the standard of "ordinary business care and prudence" regarding tax filing had not shifted. As the court explained, the taxpayers did not have to employ a tax return preparer to prepare their return, and they could have prepared and filed a paper return themselves. In addition, they could have employed a tax return preparer not subject to Rev. Proc. 2011-25 to prepare a paper return for them to file. They also had the option of employing a tax return preparer who was subject to the rules of Rev. Proc. 2011-25 to prepare the return but to paper-file it themselves, if they provided the preparer a signed statement indicating they chose to file a paper return and that they, and not the preparer, would file the return.
While finding that Boyle continued to currently apply, the court acknowledged that the taxpayers' argument would be more plausible if in the future the IRS makes e-filing mandatory or paper filing becomes so difficult that it transcends the "ordinary business care and prudence" standard.
Further, even if Boyle did not apply, the court found a taxpayer would still have a duty to exercise "ordinary business care and prudence," and thus, showing reliance on an agent as reasonable cause for late filing would still require the taxpayer to prove that the reliance was reasonable. The court stated that it is never reasonable for a taxpayer to "blindly" take someone's word that he or she will timely file the taxpayer's return. According to the court, the taxpayers did not show they took any actions that would establish ordinary business care and prudence in relying on an agent, such as seeking to verify that the filing was completed before the mistake was discovered six months later, so their reliance was not reasonable.
- Intress, 3:18-cv-00851 (D. Tenn. 8/2/19)
— By Maria M. Pirrone, CPA, LL.M., associate professor of taxation, St. John's University, Queens, N.Y.