LLC lacks reasonable cause for information-reporting failures

The Tax Court recently held that an auto dealership did not establish reasonable cause for its failure to file and furnish information returns for cash payments it received of more than $10,000, as required under Sec. 6050I. In so holding, the court denied the dealership’s argument that the software it used to track its filing obligation malfunctioned.

Facts: Dealers Auto Auction of Southwest LLC, based in Phoenix, received cash payments for purchases of vehicles while also accepting installment payments. These cash payments sometimes exceeded $10,000 per customer. As such, it was required to file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, for the payments.

In 2014, the IRS concluded that Dealers Auto had failed to meet these reporting obligations. It assessed penalties of $12,100 under Sec. 6721 and $9,100 under Sec. 6722, totaling $21,200, for failure to file information returns and failure to furnish payee statements, respectively, representing 121 failures to file and 91 failures to furnish Forms 8300.

Subsequently, Dealers Auto purchased AuctionMaster software from Integrated Auction Solutions (IAS), which included modules and instructions for preparing Form 8300. As part of the evidence provided to the court, AuctionMaster’s instructions stated, “The system will fully track cash payments from your customers and print your 8300 forms … at any time upon request.” Also, based on promotional materials from IAS, the software had been set up, tested in audits, and was approved for use by the IRS. The instruction manual and promotional materials did not indicate that the software automatically filed any Forms 8300, only that it would be able to “print all IRS 8300 forms completed for a period.”

After purchasing the software, Dealers Auto filed 116 Forms 8300 for 2016. However, the IRS determined that it should have filed at least 266 additional Forms 8300, which led to a total penalty of $118,140. According to Dealers Auto’s brief, there “may have been a failure with the computer system” (emphasis added). Nowhere was it shown, though, that Dealers Auto’s employees inputted the information correctly.

Dealers Auto did not become aware of these failures until the IRS began its examination. Once notified, it began to implement corrective actions, including internal controls and filing procedures for Forms 8300, with the intent that these returns in the future would be electronically filed.

In November 2019, the IRS sent Dealers Auto a notice of federal tax lien filing for the 2016 assessed penalties. In response, Dealers Auto requested a Collection Due Process hearing in which it sought a reasonable-cause penalty abatement. The IRS sustained the lien, and Dealers Auto petitioned the Tax Court for review.

Issues: Businesses that receive cash payments either through a single transaction or multiple related transactions of greater than $10,000 are required to file and furnish an information return (Form 8300) (Sec. 6050I). Dealers Auto did not dispute the fact that it was required to and failed to file and furnish these information returns. Secs. 6721 and 6722 each impose a $250 penalty, subject to an inflation adjustment, for each failure to file or furnish (each capped at $3 million for the year), respectively, a Form 8300.

Sec. 6724(a) states, “No penalty shall be imposed under this part with respect to any failure if it is shown that such failure is due to reasonable cause and not to willful neglect.” “Reasonable cause” is not defined by the Code, but Regs. Sec. 301.6724-1(a)(2) provides that a taxpayer has reasonable cause for failure to file information returns when either: (1) there are significant mitigating factors with respect to the failure or (2) the failure arose from events beyond the filer’s control. To have reasonable cause, the filer must also establish that it acted in a responsible manner before and after the failure occurred.

Significant mitigating factors include that (1) the filer was never required to file this specific type of return before (a first-time offense) or (2) the filer has an established history of complying with the relevant information-reporting requirements (Regs. Sec. 301.6724-1(b)). Dealers Auto met neither of these requirements, since it had filed Form 8300 in the past and had a history of noncompliance, as seen in 2014.

Regs. Sec. 301.6724-1(c)(1) does not preclude a finding that software could be a failure beyond the filer’s control, and the IRS has acknowledged that “failures related to software and hardware can be failures beyond the filer’s control” for proving reasonable cause (Internal Revenue Manual §20.1.7.12.1(24)). However, taxpayers may not rely on software if they do not input the correct information, the court noted. As stated in Bunney, 114 T.C. 259, 267 (2000), “[t]ax preparation software is only as good as the information one inputs into it.” Therefore, the court considered whether Dealers Auto had reasonably relied on the AuctionMaster software to file Forms 8300. Dealers Auto acknowledged that it did not delegate the filing of Forms 8300 to the software provider but contended that the software itself had malfunctioned by failing to notify the company that the Forms 8300 in question needed to be filed.

After reviewing the evidence, the court found that Dealers Auto had not established reasonable cause for two reasons: It failed to show that the software failed to work as intended or that it had adequate controls in place to identify noncompliance with its filing requirements.

As the Tax Court noted, it was unclear from the record how the software was alleged to have failed. As the instructions for the software suggested, the software prepared Forms 8300 for printing, but Dealers Auto asserted that the software files the forms on the user’s behalf. Thus, to the court, it was not clear whether the supposed failure was a failure to create the required forms or a failure to file them.

The evidence provided showed that the software prepared only 116 Forms 8300 in 2016. Because 212 Forms 8300 were recorded in 2014, the court found Dealers Auto should have recognized there was something wrong with the software. Instead, the company claimed it proceeded on the belief that the software worked because it was “generating some information returns” and provided no explanation of why the reduction in the number of forms would appear to be reasonable.

Holding: The court held that Dealers Auto failed to prove that it had reasonable cause for its failure to file the missing information returns for 2016. Therefore, the court upheld the penalties imposed by the IRS.

Dealers Auto Auction of Southwest, LLC, T.C. Memo. 2025-38

— Brady Ling is a recent MPS in management graduate, specializing in accounting, in the Johnson Graduate School of Management; Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy; and John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, all at Cornell University. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.