Taxpayer lacks reasonable cause for CPA’s failure to e-file his returns

The Eleventh Circuit held that the holding in Boyle, 469 U.S. 241 (1985), that a taxpayer who relies on an agent to paper-file a return lacks reasonable cause for the agent’s failure to file the return, also applies to electronically filed returns.

Facts: Wayne Lee, a Florida surgeon, hired a CPA to prepare his Form 1040, U. S. Individual Income Tax Return, for tax years 2014, 2015, and 2016. Since the CPA’s firm prepared more than 10 federal tax returns per year, it was required to efile the returns (Regs. Secs. 301.6011-7(a) (3) and (b); Regs. Sec. 301.6011-2(a)(1)).

Lee’s CPA prepared the returns, each of which reported roughly $1 million in gross income and “six-figure” overpayments for each year and applied each of these overpayments to Lee’s following year’s estimated tax. Lee reviewed each return; signed Form 8879, IRS e-file Signature Authorization, authorizing his CPA to e-file each return; and returned the forms to the CPA.

Nonetheless, Lee’s CPA failed to file any of the returns for 2014 through 2016. Lee noted in his complaint that his CPA informed the IRS, but not him, that the firm’s tax software was incapable of preparing his returns “due to their complexity.” Lee learned the returns had not been filed when an IRS agent notified him during a visit to Lee’s office on Dec. 5, 2018. Lee never received a letter from the IRS notifying him that his returns were unfiled because his mailing address on file with the Service was incorrect. Lee claimed that his CPA was supposed to correct the address but had failed to do so.

In December 2018, Lee filed his tax returns for 2014 through 2016. The “lookback period” under Sec. 6511(b)(2)(A), in which taxpayers generally may claim a credit only for payments made within the prior three years (plus any extension), began in June 2015. Lee had made no tax payments after April 2015 and so the IRS disallowed his overpayment for the 2014 tax year, since it was paid outside the lookback period. As a result, Lee owed taxes for 2015 and 2016, as well as over $70,000 in failure-to-file and failure-topay penalties. Lee settled his outstanding tax liability and penalties with the IRS for $289,183 in August 2019.

Lee eventually sued his CPA and the CPA’s firm to recover damages for their negligence in failing to file his tax returns for the years in question. He also filed a refund suit in district court for a refund of his taxes and fees, claiming that he had exercised ordinary business care and prudence by signing Forms 8879 because he had relied on his CPA to file his returns, which constituted reasonable cause under Sec. 6651(a). The IRS moved for summary judgment. The district court granted the motion, concluding that the holding in Boyle applied to e-filed returns as well as paper-filed ones, so Lee did not have reasonable cause for the late filing of his returns or the late payment of his taxes (Lee, No. 8:21-cv-1579 (M.D. Fla. 2/8/22)).

Lee appealed the district court’s decision to the Eleventh Circuit, advancing three arguments: (1) Boyle did not apply to e-filed returns; (2) despite Boyle, he demonstrated reasonable cause for the late filing under Sec. 6651; and (3) the IRS erroneously assessed the failure-topay penalties, since he timely paid his tax liability.

Issues: Sec. 6651(a) prescribes penalties for failure to timely file a required return or pay the tax amount shown due on the return. However, a taxpayer may not be liable for these penalties if the failure is “due to reasonable cause and not due to willful neglect” (Secs. 6651(a) (1) –(2)). Reasonable cause exists if the taxpayer exercises “ordinary business care and prudence,” while willful neglect is a “conscious intentional failure or reckless indifference” (Regs. Sec. 301.6651-1(c) (1) ; Boyle, 469 U.S. at 245).

In Boyle, the taxpayer claimed that his attorney failed to file his federal estate tax return by the prescribed due date, even though the taxpayer provided all the records the attorney requested to prepare the return and even sought periodic updates on the status of the return. In its opinion, the U.S. Supreme Court provided a “bright-line” test that “failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not ‘reasonable cause’ for a late filing under [Sec.] 6651(a)(1)” (Boyle, 469 U.S. at 248, 252) . Therefore, reliance on a tax preparer does not excuse a taxpayer from complying with return filing deadlines (Boyle, 469 U.S. at 251). The Internal Revenue Code puts an “unambiguous, precisely defined duty” on taxpayers to file their returns timely (Boyle, 469 U.S. at 250). Even though Boyle applies to failure-tofile claims, courts have held that it also applies to failure-to-pay penalties.

Lee contended on appeal that Boyle did not govern his case because: (1) Boyle does not apply to e-filed returns; (2) e-filing was his CPA’s exclusive responsibility; and (3) Boyle does not “preclude consideration of factors beyond the taxpayer’s control” in determining reasonable cause.

In support of his first contention, Lee argued that by signing Form 8879, taxpayers indicate that their return “to the best of [the taxpayer’s] knowledge and belief” is “true, correct, and complete.” In Boyle, the taxpayer delegated to his attorney preparing the return and informing him when it was due. Similarly, Lee’s CPA apprised him of all the filing deadlines and assured him that the returns were prepared by these deadlines.

The Eleventh Circuit noted that Form 8879 is an authorization from, not a return. Thus, signing and returning a Form 8879 authorized Lee’s CPA to e-file a return, which was not the same as filing the return. Accordingly, signing a Form 8879 does not relieve a taxpayer from exercising ordinary business care and prudence in filing an income tax return.

Lee also claimed that after he signed Form 8879, filing his returns was “beyond his control,” like the circumstances mentioned in footnote 6 of the Boyle opinion. The Supreme Court said in the footnote to its Boyle opinion that certain circumstances beyond the taxpayer’s control, such as “mail delays and sickness,” excuse late filings from penalties (Boyle, 469 U.S. at n. 6).

However, the Eleventh Circuit found that Lee had misread the footnote he relied on from Boyle, which would exempt a late filing as beyond a taxpayer’s control only in the case of a disability that rendered the taxpayer incapable by objective standards of meeting the criteria of ordinary business care and prudence. Lee trusted an agent to file his taxes and was not subject to a disability or illness that rendered him incapable of exercising ordinary business care and prudence. Therefore, his circumstances fell outside the exceptions noted in the footnote to Boyle, and he had a duty to supervise his CPA during the compliance process and to ensure, after signing the Form 8879, that the returns were submitted to the IRS, the court held.

Lee next argued that Congress “shifted the e-filing burden to tax preparers.” A tax return preparer is any individual who prepares “tax returns for compensation” (Regs. Sec. 301.7701-15(a)). Any preparer who files 10 or more individual income tax returns in a calendar year as a “specified tax return preparer” must e-file them (Regs. Sec. 301.6011-2(a)(1); Regs. Secs. 301.6011-7(a)(3) and (b)). However, in such instances, the preparer may deliver a paper return to the taxpayer, who will submit it to the IRS (Regs. Sec. 301. 6011(7)(a)(4)(ii)).

An electronic return originator (ERO) is an “authorized e-file provider” and begins the submission process (Publication 3112, IRS E-File Application & Participation, p. 15 (October 2022)). An ERO can prepare returns, but the IRS considers preparation and origination distinct activities (id.). EROs also must not “stockpile” returns by waiting more than three days to e-file them (Publication 1345, Authorized IRS e-file Providers of Individual Income Tax Returns, pp. 22 and 48 (Nov. 2022)).

Lee contended that since the returns were not filed within three calendar days of his CPA’s receiving the signed Forms 8879, this legal obligation “undermines Boyle’s bright line rule.” However, the court stated that despite delegating his returns’ preparation and filing to the CPA, Lee still fully controlled the process and as “a person experienced in business matters” could file his returns personally. Also, Lee could have confirmed that the firm had the appropriate software to file his returns. Even if, assuming for the sake of argument that an IRS publication transposed the filing obligation to the ERO, it could not preempt the Supreme Court’s holding in Boyle that taxpayers have an “unambiguous, precisely defined duty to file” timely returns.

Congress authorized the e-filing process because it is more “accessible, accurate, and administrable than paper filing” (Sec. 6011(f)(1)). Even though Boyle provides exceptions in certain circumstances that constitute reasonable cause, it does not provide an exception for “complex tax situations and tortuous e-filing procedures,” the Eleventh Circuit stated. These are not considered disabilities that prevent the taxpayer from exercising the ordinary business care and prudence necessary to establish reasonable cause.

The court further held that even if Boyle were disregarded, Lee could not demonstrate reasonable cause for the late filings. Even in cases before Boyle, courts have held that “a taxpayer does not show reasonable cause for a late filing by relying on an accountant” (e.g., Laney, 674 F.2d 342 (11th Cir. 1982)). This holds true whether the return is e-filed or paperfiled, the court stated. Lee “blindly relied on his agent to his detriment.” Therefore, reasonable cause did not exist for the failure-to-file or failure-to-pay penalties.

Lastly, Lee argued that Sec. 6651(a) (2) penalties “do not apply if the IRS disallows a credit after a return is filed.” The court did not consider this argument, since it was not raised in the lower court.

Holding: In upholding the district court’s grant of the IRS’s motion for summary judgment, the Eleventh Circuit held that Boyle applies to e-filed returns the same way it does to paperfiled returns. Also, Lee did not demonstrate reasonable cause for his failure to timely file and for failure to pay his taxes when due.

A separate concurring opinion provided some tips for staying on top of the filing compliance process. These include independently confirming with the IRS that the taxpayer’fs return has been filed and choosing to file the return “independently on paper.”

■ Lee, No. 22-10793 (11th Cir. 10/24/23) .

— John McKinley, CPA, CGMA, J. D., LL.M., and Thomas Godwin, CPA, CGMA, Ph.D., are both professors of the practice in accounting and taxation in the SC Johnson College of Business at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.