Boyle rule applies to e-filed returns

The Eleventh Circuit held that the Boyle bright-line rule — that reliance on an agent, without more, does not constitute reasonable cause for failure to file a tax return — applies to efiled returns.

Background

Wayne Lee, a Florida surgeon, hired CPA Kevin Walsh to prepare and file his federal income tax returns for 2014, 2015, and 2016. Walsh’s firm, ATROX Partners, prepared and filed more than 10 federal tax returns each year. Thus, under Regs. Sec. 301.6011-7, Walsh was a “specified tax return preparer,” requiring him to file all prepared returns on magnetic media, as defined in Regs. Sec. 301.6011-2(a)(1), which includes e-filing.

Walsh prepared Lee’s tax returns for the three years. Each return claimed approximately $1 million in gross income and showed six-figure overpayments, which Lee chose to apply to the following year’s estimated tax. Lee reviewed the return for each year and signed a Form 8879, IRS e-file Signature Authorization, authorizing Walsh to e-file the return on his behalf.

However, Walsh did not file any of the returns; according to Lee, Walsh informed the IRS that ATROX’s tax preparation software was incapable of preparing Lee’s returns due to their complexity. Lee also claimed that Walsh never told him about his failure to file the return, and he only learned about it after a visit from an IRS agent to his office in December 2018. Lee received no letters from the IRS about the unfiled returns because his mailing address on file with the IRS was incorrect. Lee claimed that Walsh had agreed to update his mailing address with the IRS but had never done so.

Upon finding out about the unfiled returns, Lee submitted them to the IRS in December 2018. Under Sec. 6511(b) (2)(A), the lookback period for calculating Lee’s credits therefore began in June 2015. Lee had not made any 2014 tax payments after April 2015, so the IRS disallowed his 2014 overpayment of $288,409. Consequently, Lee had no overpayment amount from 2014 to carry forward to future years, which caused him to owe taxes for 2015 and 2016, as well as over $70,000 in failure-to-file and failure-to-pay penalties. In August 2019, Lee paid the IRS $289,183 to settle the outstanding tax liability and penalties. He later sued ATROX and Walsh to recover damages caused by Walsh’s negligent failure to file the tax returns at issue, with the suit being settled in early 2020.

In Boyle, 469 U.S. 241 (1985), decided before the advent of electronic filing, the Supreme Court established the bright-line rule that reliance on an agent, without more, does not amount to reasonable cause for failure to file a tax return on time for purposes of the Sec. 6651(a) penalty. Although the Boyle decision involved the failure-to-file penalty, the bright-line rule from the case is also generally applied to the failure-to-pay penalty.

Besides his malpractice suit against Walsh and his firm, Lee also filed a refund suit in district court for both the taxes and the late-filing and late-payment penalties, claiming that he had reasonable cause under Sec. 6651(a) for his late filings and late payments because of his reliance on Walsh. The IRS moved for summary judgment, and the district court granted the motion, finding that Lee did not have reasonable cause for his failure to timely file his returns. While Boyle predated e-filing and thus did not discuss it, the district court concluded that the bright-line rule from Boyle also applies to e-filed returns.

Lee appealed the district court’s decision to the Eleventh Circuit. On appeal, Lee contended that Boyle does not apply to e-filed returns, that he demonstrated reasonable cause for the late filings under Sec. 6651 whether Boyle applied or not, and that the IRS incorrectly assessed the failure-to-pay penalties because he timely paid the amounts shown on the returns.

The Eleventh Circuit’s decision

The Eleventh Circuit affirmed the district court’s grant of summary judgment in favor of the IRS, rejecting Lee’s first two appeal arguments and holding that he had waived the third because he had raised the issue for the first time on appeal.

Applicability of Boyle: Lee argued that Boyle did not apply in his case for three reasons: (1) Form 8879 exempts e-filing from the rule in Boyle; (2) the e-filing burden fell on Walsh, not Lee; and (3) Boyle does not preclude consideration of factors beyond the taxpayer’s control when deciding whether reasonable cause exists.

With regard to the Form 8879 argument, Lee tried to distinguish the facts of his situation from those of the taxpayer in Boyle. He argued that Walsh had already prepared the returns at issue, which Lee authorized for electronic submission each year by completing Form 8879, by which the taxpayer in Boyle had delegated to his agent the responsibility of preparing his returns and informing him of when they were due. Thus, in Lee’s view, after he signed Form 8879 and sent it to Walsh, unlike the taxpayer in Boyle, he had nothing left to do. Consequently, Walsh’s failure to file the return was a circumstance beyond Lee’s control, like those mentioned in footnote 6 of the Boyle opinion. In that footnote, the Supreme Court acknowledged that circumstances “beyond [the taxpayer’s] control,” such as mail delays and sickness, “exempt late filings from the penalty” for late filing.

The Eleventh Circuit found fault with this argument for several reasons. First, it observed that Form 8879 is an authorization form, and authorizing the filing of the return is not the same as filing the return. Therefore, Lee continued to have a duty to supervise Walsh and ensure he had filed the returns.

The Eleventh Circuit also found that Lee had misread footnote 6 in Boyle and that his circumstances did not fall within it. Besides circumstances such as postal delays and illness, the Supreme Court stated that the principle of exempting factors beyond the taxpayer’s control might cover a filing default by a taxpayer who suffered a disability that rendered the taxpayer incapable of meeting the objective standards of “ordinary business care and prudence” that are required for a taxpayer to have reasonable cause. After signing and sending Walsh the Form 8879, Lee did not have a disability or circumstance outside his control that prevented him from ensuring that Walsh filed the return.

Finally, the Eleventh Circuit found that Lee’s reliance on Walsh was similar to that of the taxpayer and his agent in Boyle, although the object of their reliance was different. In Lee’s case, it was to e-file a return, and in the Boyle taxpayer’s case it was to file a paper return. Nonetheless, as the Boyle taxpayer’s reliance on his agent did not absolve him of his duty to file, the court concluded that Lee’s reliance on Walsh did not absolve him of his duty to file.

With regard to his argument that the filing burden had transferred to Walsh, Lee claimed that it flowed from Publication 3112, IRS E-file Application & Participation, and Publication 1345, Authorized IRS E-File Providers of Individual Income Tax Returns. The former publication states that an electronic return originator (ERO) is an authorized e-file provider and begins the process of submitting an electronic return after receiving authorization in a Form 8879 from the taxpayer, and the latter publication states that the ERO must submit an electronic return within three days after it has all the necessary information for origination of the return. This legal obligation to e-file an electronic return in three days, according to Lee, undermines the Boyle bright-line rule.

The Eleventh Circuit disagreed. The court pointed out that, despite delegating his tax preparation and filing to Walsh, Lee retained “full control over the process” and was not forced to work with Walsh. Also, Publication 1345 required the IRS to acknowledge acceptance of the return for it to be considered filed, so Lee’s signing the Form 8879 did not complete the filing process. The court also found that even if the publication did shift the filing obligation to EROs, the publication “cannot trump the Supreme Court’s holding that taxpayers have ‘an unambiguous, precisely defined duty to file’ timely tax returns.”

Lee maintained that he had demonstrated circumstances beyond his control — the complexity of both his own tax situation and e-filing generally. The Eleventh Circuit stated it did not need to “rehash” its earlier discussion. It again observed that the circumstances Lee complained of — complex tax situations and difficult e-filing procedures — are not disabilities that divest a taxpayer of the faculties needed for ordinary business care or prudence.

Thus, Lee did not have any disabilities that prevented him from exercising the ordinary business care or prudence necessary to have reasonable cause. As the court stated, “If the alleged complexity of e-filing is so beyond the taxpayer’s control that it renders the taxpayer incapable of ordinary business care and prudence, the overwhelming majority of taxpayers would have reasonable cause for late filing. That conclusion would raze the tax filing regime and undermine Boyle’s bright line rule.”

Reasonable cause: Although the Eleventh Circuit’s decision that Boyle applied to e-filed returns obviated Lee’s argument that he had demonstrated reasonable cause for his failure to file his returns on time, the court addressed the issue.

The court found that he failed to demonstrate that he had reasonable cause for both the failure-to-file and failure-to-pay penalties. For the failureto- file penalties, the court noted he had “showed some diligence by reviewing his tax returns, signing Form 8879, authorizing Walsh to e-file the returns each year, and overpaying his 2014 taxes.” However, Lee’s 2014 overpayment “cannot cure his failure to file,” the court stated. Moreover, and more importantly, Lee did not confirm that the returns had been filed. The court found that Lee had blindly relied on his agent and could not say that such reliance, without more, amounted to reasonable cause.

To demonstrate reasonable cause for a late payment, a taxpayer must show he or she “exercised ordinary business care and prudence in providing for payment of [the] tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship” by paying the tax on the due date (Regs. Sec. 301.6651-1(c) (emphasis added). The court found that Lee did not exercise ordinary business care and prudence by confirming that the IRS received his 2014 tax return and overpayment, from which all his calculations for estimated tax liability going forward were based. Further, Lee never contended that financial hardship prevented him from paying his taxes by the deadline. Thus, even if the court disregarded Boyle, he did not have reasonable cause for his failure to pay.

Incorrect failure-to-file penalty: In Lee’s objection to the IRS’s motion for summary judgment in district court, he did not argue that the IRS had incorrectly calculated the assessed penalties. Because he raised the argument for the first time on appeal, the Eleventh Circuit would not consider it.

Reflections

This case demonstrates the very real dangers to practitioners of not being diligent about e-filing returns for which they accept the responsibility of filing. While under Boyle, if a practitioner does not e-file a return, the taxpayer will be held responsible for the failure to file a return and failure to make required payments and any resulting penalties, taxpayers who are harmed by negligent practitioners will almost certainly make their problem the practitioner’s problem by filing a malpractice suit against the practitioner. Ultimately, a high level of diligence and care upfront will help prevent a potentially ugly situation.

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

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.