Reliance on preparer is not reasonable cause for late filing

By James A. Beavers, CPA, CGMA, J.D., LL.M.

A federal district court held that the Supreme Court's holding in Boyle, 469 U.S. 241 (1985), which was decided at a time when returns could only be paper-filed, applies to e-filed returns; thus, the taxpayers' reliance on a third-party professional to e-file their joint return was not reasonable cause for their failure to timely file the return.

Background

Kristin Intress and Patrick Steffen were a married couple who filed a joint return for the 2014 tax year. Intress and Steffen were out of the country at or around the tax filing deadline for 2014, so they arranged to have their tax return preparer file an extension of time to file their 2014 return. The return preparer, at 7:01 p.m. on April 15, 2015, completed a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, for the taxpayers and queued it up to be filed by her e-file software. However, she failed to hit "send" and the Form 4868 was not electronically received by the IRS on the April 15, 2015, deadline. The tax return preparer had never experienced an error like this before and did not discover until October 2015 that the extension form had not been filed.

As a result, Intress and Steffen's return was not filed timely and the IRS assessed a $120,607.27 penalty against them. After exhausting their administrative appeals with the IRS, the couple paid the penalty on Nov. 1, 2016. In March 2017, they filed a refund and abatement request. The IRS denied the request.

Intress and Steffen then filed a refund suit in district court. The couple argued that the late filling of their 2014 return was due to reasonable cause and not due to willful neglect because they had relied on a third-party preparer to timely file their return, so they were entitled to an abatement of the late-filing penalty. Although the Supreme Court in 1985 held in Boyle that reliance on a third party to file a return will not establish reasonable cause for the late filing of a return, Intress and Steffen asserted that the holding in Boyle did not apply to e-filed returns.

The district court's decision

The district court held that the taxpayers were not entitled to an abatement of the penalty for the late filing of their 2014 return. The court concluded that although the Boyle case was decided at a time when returns were exclusively paper-filed, the holding in the case also applies to e-filed returns, and thus the court was prohibited from finding that the taxpayers had reasonable cause for not timely filing their return.

Boyle decision: In Boyle, the Supreme Court held that a taxpayer's reliance on an agent for tax filing is not reasonable cause for abatement of late penalties should the third party fail to file timely. The Court, citing Regs. Sec. 301.6651-1(c)(1), defined reasonable cause as being "unable to file the return within the prescribed time" notwithstanding the taxpayer's exercise of "ordinary business care and prudence" (Boyle, 469 U.S. at 246). The Court reasoned that the timely filing of required returns is a duty placed on a taxpayer and not on a taxpayer's agent, and the duty requires no special training or effort on the part of a taxpayer and, accordingly, no assistance from an agent to fulfill. Thus, relying on an agent to file a return is not reasonable.

Boyle's application: Intress and Steffen argued that changes in tax filing procedures since Boyle made the bright-line rule in Boyle inapplicable in their case. They contended that under Rev. Proc. 2011-25, "specified tax return preparers" (defined in Sec. 6011(e)(3)(B) as preparers that plan to file more than 10 returns a year) must e-file returns, and, as a result, filing taxes through a tax return preparer "now necessarily involves use of specialized software that a taxpayer cannot employ totally independently" (slip op. at 5-6). Consequently, the couple asserted that the filing of a return, which was a task that required no special training or effort and could be performed by a layperson at the time of the Boyle decision, has become, due to the use of tax software, one that requires reliance on an agent.

According to Intress and Steffen, the requirement to use a tax return preparer and the preparer's use of e-file software created a situation beyond the taxpayer's control. Because the IRS has generally considered a taxpayer to have reasonable cause for compliance failures caused by things beyond his or her reasonable control, a finding of reasonable cause based on the taxpayer's reliance on a third-party tax professional was therefore justified.

The district court, however, found that Boyle applied to Intress and Steffen because, like the taxpayer in Boyle, they were not required to use tax preparation services. The court observed that, as was the case in 1985, individuals without specialized expertise can still prepare and file their own paper returns, and the decision to use a tax preparation service is within the taxpayer's control.

The court also noted that a taxpayer can have a paper return prepared by a return preparer who is not a specified tax return preparer and is not prohibited from filing a paper return for a taxpayer. Furthermore, even if a taxpayer employs a specified tax return preparer to prepare a return, the taxpayer can still paper-file the return if the taxpayer takes personal responsibility for filing the return by signing a statement that states that the taxpayer has chosen to file a paper return, and the taxpayer, not the preparer, is filing the return.

Because the same filing options that existed in 1985 (mailing a personally or professionally prepared return) still exist, the court held that the bright-line rule set out in Boyle has not changed, and, as the Supreme Court stated in its opinion, "reliance [on an agent] cannot function as a substitute for compliance with an unambiguous statute" (Boyle, 469 U.S. at 251).

Reasonableness outside the context of Boyle: The court further found that even if Boyle did not apply to e-filed returns, it would not eliminate a taxpayer's duty to exercise "ordinary business care and prudence." Therefore, if Boyle did not apply, the court stated, a taxpayer that claimed reliance on an agent as reasonable cause for late filing would still be required to prove that the reliance was reasonable. According to the court, "it would never be reasonable to blindly take someone's word that he will timely file your taxes" (slip op. at 10). Thus, because it was unclear that the taxpayers had tried to verify that their tax return preparer had properly filed an extension for their return before the mistake was discovered six months after the extension was supposedly filed, the court determined that Intress and Steffen's reliance on their tax return preparer was not reasonable.

Reflections

The court noted that Intress and Steffen's theory will be much more plausible if, in the future, the IRS requires all returns to be e-filed or the paper-filing process becomes so difficult that paper-filing a return becomes a task that exceeds ordinary business care and prudence. At that point, in the court's view, the average taxpayer would be required to rely on an agent or intermediary for transmission of the electronic return and, consequently, reliance on an agent might be justified.

Intress, No. 3:18-cv-00851 (M.D. Tenn. 8/2/19)

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