Taxing Lessons Case Summaries

Case — Reliance on Accountant’s Advice

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TL Case Summ

THE QUESTION

When can a taxpayer rely on an accountant’s advice as reasonable cause for penalty abatement?

THE DISPUTE

Taxpayer Says: He was entitled to penalty abatement because his reliance on his accountant’s erroneous advice was reasonable cause for late filing.

Internal Revenue Service Says: Taxpayer’s reliance on accountant was not reasonable cause, and the penalties should not be abated.

THE LAW

From Internal Revenue Code Section 6075(a): An estate-tax return, Form 706, must be filed within nine months of the decedent’s death.

From Internal Revenue Code Section 6081(a): While the IRS “may grant a reasonable extension of time for filing any return,” “no such extension shall be for more than 6 months” except in the case of taxpayers who are abroad.

From Internal Revenue Code Section 6651(a)(1): An executor who fails to file a timely estate-tax return is subject to a penalty. The late filing penalty is mandatory when a taxpayer fails “to file any return . . . on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect.”

From Federal Tax Regulation 20.6081-1(b): An executor may apply for an automatic six-month extension of time to file Form 706 by filing Form 4768 on or before the due date of the return and checking the appropriate box.

From Federal Tax Regulation 20.6161-1(a)(1): Extensions of the deadline to pay the estate tax operate differently. Treasury Department regulations specify that the IRS may grant an extension of time to pay estate taxes, at the written request of the executor, “for a reasonable period of time, not to exceed 12 months.”

From Federal Tax Regulation 301.6651-1(c)(1): To establish reasonable cause, a taxpayer must prove that he “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.”

THE CAUSE OF THE DISPUTE

In general, you are responsible for filing your tax returns in a timely manner, and you may have to pay penalties when you fail to do so. When you rely on the advice of a tax preparer, you might qualify for the “reasonable cause” exception, and avoid having to pay the penalties.

Disputes arise because reliance on a tax preparer is based on whether the advice received is substantive advice on tax law, or nonsubstantive advice, which requires no special training or effort on the part of the taxpayer to understand, and on which executors may not rely. (See Boyle, 469 U.S. 241.)

In this case, the taxpayer was the executor of an estate with a initial due date of August 30, 2006. He asked his accountant to request an extension of time to file and pay. The accountant told the taxpayer a twelve-month extension was available for both filing and paying. The accountant prepared the form, requesting an extension to August 30, 2007. He sent a copy of the completed extension to the taxpayer.

The IRS approved the extension request in writing on January 11, 2007. On the form itself, which the IRS returned to the accountant, an IRS agent had hand-written “2/28/07” next to the box the accountant had checked to apply for the automatic six-month extension of the filing deadline.

A new document, titled “Notice to Applicant,” was attached to the returned application. The Notice to Applicant included two sections: the first relating to the application for an extension of the filing deadline, and the second to the application for an extension of the payment deadline. Three checkboxes appeared in both sections: “Approved,” “Not approved because,” and “Other.” None of the boxes was checked in the first section. In the second section, the IRS agent had checked “Approved” and had typed, “To 8/30/2007 only.”

The estate tax return was completed and submitted to the IRS on May 29, 2007, along with a check for the tax due.

In 2008, the IRS assessed a late-filing penalty for a four-month delinquency, excluding interest. The taxpayer called the accountant to ask why the IRS believed the estate tax return was late. The accountant reviewed the regulations and realized he had made an error.

The taxpayer requested an abatement of the penalty, saying his reliance on the accountant’s erroneous advice was reasonable cause for the late filing. The IRS denied the abatement request. The taxpayer administratively appealed the IRS’s decision, but the IRS denied the appeal. The taxpayer then paid the full amount due and filed a Claim for Refund with the IRS. When the IRS rejected the claim, the taxpayer brought this refund action.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 130KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!
For the IRS. We conclude that the question of when a return is due–even when an executor has sought an extension–is nonsubstantive. The deadlines here brook no debate. It was clear from the face of Form 4768, from the corresponding instructions, and from the governing statute that the maximum available extension of the filing deadline was six months. The question of how long an extension was available was not a “debatable” one. For that reason, the taxpayer cannot show reasonable cause to excuse his late filing.
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