Taxing Lessons From Court Decisions

Reasonable Cause

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When you accidentally run afoul of tax rules, you may be able to avoid the resulting penalties if you have reasonable cause for your error.

One typical example of reasonable cause is reliance on a tax advisor. The tax court has found that it’s reasonable to rely on a competent advisor regarding a matter of tax law, such as whether a liability exists, or whether return is due.

This excuse does have limits. For example, relying on your advisor to file your tax return in a timely manner is not reasonable cause for avoiding penalties on late filing. The question the court asks is whether you relied on your advisor that no return was due, or whether you relied on your advisor to file your return on time.

In Tesoriero (T.C. Memo. 2012-216), the taxpayer filed his 2004 federal income tax return on August 15, 2005. He believed his accountant had filed an extension of time, and that the return was therefore timely. The IRS had no record of receiving the extension, and assessed penalties for late filing.

Because there was no doubt the taxpayer was required to file the return, and his advisor did not tell him he was not required to file, the court said the taxpayer did not have reasonable cause to avoid the penalty.

That was true even though the accountant testified that he had mailed the forms, and the court did not doubt his veracity. However, the accountant did not mail the extension using registered or certified mail, or an authorized private delivery service, so he had no proof it was sent to the IRS.

Since this case is appealable to the Second Circuit, and that court holds that no other proof, including testimony, demonstrates actual receipt by the IRS (see code section 7502), the taxpayer was unable to establish that he filed a valid extension request.

Taxing Lesson: In taxes, as in life, you are responsible for your actions – even if it’s not your fault you never learned to accept responsibility.

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