A Recent Case Might Provide Relief

For individuals, tax returns must be filed with the Internal Revenue Service (“IRS”) by April 15, or October 15, if the individual timely requests an extension. If a taxpayer does not timely file their tax return, the IRS may assess a penalty for not timely filing their return. The IRS imposes this penalty (technically, an “addition to tax”) under Internal Revenue Code (I.R.C.) § 6651(a)(1) (sometimes called the “failure to file” or “delinquency” penalty). The IRS refers to reducing or removing a penalty as an “abatement.”

In this excellent post, Michele Weiss goes into detail about the two main ways to avoid these penalties: the IRS’s First Time Abatement program and proving “reasonable cause.” A recent case may provide an additional route to avoid this penalty.

Court have long held that if a taxpayer files a tax return late, they cannot avoid the late-file penalty by saying that they relied on their return preparer, accountant, or attorney. In United States v. Boyle, 469 U.S. 241 (1985), the U.S. Supreme Court said that timely filing a tax return is a “personal and nondelegable duty.” This means that a taxpayer cannot delegate this responsibility to someone else. Instead, the taxpayer must ensure that their return is filed timely.

However, when the Supreme Court decided Boyle, the IRS did not have an option to electronically file tax returns (IRS efiling started the next year in 1986). For many taxpayers, when their return preparer or accountant electronically files the return, the taxpayer takes three main steps: (1) the taxpayer provides their return preparer with all documents needed to prepare the return, (2) the taxpayer reviews a copy of the return, and (3) the taxpayer signs an IRS Form 8879 IRS e-file signature authorization. Once these steps are done, the taxpayer might never know exactly when their tax return is efiled and accepted by the IRS.

In Haynes v. United States, the taxpayer’s accountant timely transmitted the return electronically through the Lacerte tax preparation software. Unfortunately, the IRS rejected the electronic return based on a small error. The taxpayer did not know that there was an error until a year later when the taxpayer received a letter from the IRS. In this letter, the IRS stated that it had not yet received a tax return from the taxpayer. The taxpayer immediately filed a new return, but the IRS assessed a “failure to timely file” penalty. The taxpayer then filed a lawsuit to challenge this penalty.

At the trial court (U.S. district court), the court cited to Boyle and said that the taxpayer is liable for the penalty. The taxpayer then appealed to the Fifth Circuit Court of Appeals. The Fifth Circuit suggested that the taxpayer might not be liable for the penalty because the taxpayer may have relied on his accountant to timely file the return.

Has the IRS assessed a penalty against you or your client for not timely filing a tax return? You might not owe this penalty. However, this is a complex area of law that requires a detailed analysis of all facts.

Former IRS Attorneys of Holtz, Slavett & Drabkin, APLC represent clients in penalty abatement cases, as well as sensitive domestic and international tax examinations, employment tax cases, and difficult tax collection matters. David J. Warner is a former IRS Attorney who, while at the IRS, handled dozens of Tax Court cases involving the failure to timely file penalty. Please contact David at (310) 550-6200 to schedule a consultation.