How difficult is it for a taxpayer to establish “reasonable cause” such that penalties for various tax mishaps can be forgiven or abated? It’s very difficult. The recent case of Wayne Lee v. United States, No. 22-10793 (11th Cir. 10/24/23) underscores the point and reminds taxpayers to get reliable tax advisors and return preparers. Going cheap is not a panacea and often only leads to trouble, especially if the tax issues are complex (as is typically the case when any US international/foreign tax issues are involved.
Here’s some factual background and what happened to Dr. Lee:
The taxpayer, Dr. Lee, was a Florida surgeon who hired a CPA to prepare his 2014-2016 US income tax returns. Since the CPA prepared over ten US tax returns per year, he was required to e-file the returns. The CPA prepared Dr. Lee’s returns for each year in issue, reporting approximately US$1 million in gross income and significant “six-figure” overpayments. Each year’s overpayments were applied to the following year for Dr. Lee’s estimated tax liability. Dr. Lee always reviewed the tax returns and gave the CPA a duly signed Form 8879, IRS e-file Signature Authorization, authorizing the CPA to e-file each year’s return.
The CPA failed to file any of the tax returns for 2014-2016. (smh)
Get this – the CPA informed the IRS, but never advised Dr. Lee that the firm’s tax software was incapable of preparing the returns “due to their complexity!” Dr. Lee only learned that his returns had never been filed when an IRS agent visited Dr. Lee’s office in 2018. As an aside, Dr. Lee had never received any written notification from the IRS about the unfiled returns since the mailing address the IRS had on file was incorrect. Dr. Lee claimed that his CPA was supposed to correct the address but had never done it. (smh, again). If you change your address, make sure the IRS knows of the new address. It is easy to do and must be done correctly. My earlier blog post provides all the details.
Things got worse for Dr. Lee when the IRS disallowed his overpayment for the 2014 tax year, since it fell outside the tax law’s permissible lookback period. Dr. Lee owed taxes for 2015 and 2016, and well over $70,000 in failure-to-file and failure-to-pay penalties, with the final number settled at US$289,183. Dr. Lee filed suit in district court for a refund, claiming he had “reasonable cause” and had exercised ordinary business care and prudence by signing Forms 8879 because he had relied on a tax professional to file his tax returns.
Decision of the Courts – No “Reasonable Cause”
Almost 40 years ago, in United States v. Boyle, 469 U.S. 241 (1985), the US Supreme Court established the bright line rule that “reliance on an agent,” without more, does not amount to “reasonable cause” for failure to timely file a paper tax return. If the tax return preparer in Lee had failed to file paper tax returns, the Supreme Court decision in Boyle would have ended the matter and shut down Dr. Lee’s reasonable cause defense. The case with Dr. Lee, however, involved e-filed returns and the issue was whether the Boyle holding would apply to a failure to e-file a taxpayer’s tax returns.
The district court applied the holding in Boyle to the case and concluded that Dr. Lee did not have reasonable cause for the late tax filings and payments. Dr. Lee appealed to the 11th Circuit and made various arguments, including that Boyle did not apply to e-filed returns and regardless of the Boyle decision, he demonstrated reasonable cause for the late filing and late payments. The 11th Circuit affirmed the decision of the district court.
The court determined that even if Boyle were disregarded, Dr. Lee could not demonstrate reasonable cause for the late filings. The court noted that in cases decided prior to Boyle, other courts had held that “a taxpayer does not show reasonable cause for a late filing by relying on an accountant” (citation omitted). Whether the return is e-filed or paper-filed makes no difference.
“Reasonable Cause” – Not Easy to Get
I have written before on the difficulty taxpayers face when trying to establish “reasonable cause” – it is not easy to get. This is so even when taxpayers have relied on incorrect professional advice. Treasury Regulations on this issue clearly state that “reliance may not be reasonable or in good faith if the taxpayer knew, or reasonably should have known, that the advisor lacked knowledge in the relevant aspects of Federal tax law.”
A few other points made by the 11th Circuit deserve mention. These points (quotation below) squarely put the burden on the taxpayer to make sure tax returns are filed properly. Mercilessly, the court stated the Dr. Lee “blindly relied on his agent to his detriment.”
“First, despite delegating tax preparation and filing to [the CPA] Lee retained full control over the process and was in no way forced to work with his agent. In theory, ‘a person experienced in business matters can [file a tax return] personally.’ [quoting Boyle, 469 U.S. at 252]. Nothing prevented Lee, a sophisticated high-income earner, from preparing and filing the returns himself …. Alternatively, before hiring a CPA, he could have confirmed that the CPA’s firm had the proper software to handle his returns. And under 26 C.F.R. § 301.6011-7(a)(4)(ii), he could have taken the returns prepared by [the CPA] and filed them in paper format directly with the IRS.
Second, the IRS publication on which Lee relies underscores that “[a]n electronically filed return is not considered filed until the IRS acknowledges acceptance.” IRS Pub. 1345, supra, at 7 (emphasis added). Thus, Lee’s signing Form 8879 each year did not complete the filing process—he needed to obtain acknowledgment from the IRS. Even if, arguendo, the publication transposes the filing obligation to EROs, it cannot trump the Supreme Court’s holding that taxpayers have ‘an unambiguous, precisely defined duty to file’ timely tax returns. [Boyle, 469 U.S. at 250].”
Don’t expect mercy from the IRS or the courts. Your duty to file and pay tax cannot be delegated. It is personal to you and this underscores the necessity of using a professional who has ethics, integrity and the proper skills. It’s sad to say, but I am finding it more frequently happening that there are many “professionals” out there who are lacking all of these qualities.
Buyer Beware.
Posted February 29, 2024
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