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Instances When the IRS Might Forgive and Forget

Dec 5th 2016
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The IRS slaps stiff penalties on tardy taxpayers who miss the deadlines for filing returns or making payments. To get the feds to waive a penalty, a taxpayer has to convince them that the delay was “due to reasonable cause and not due to willful neglect.”

The tax enforcers have long-standing guidelines on what this means. Though the agency tells its examiners to judge each case by its own facts, there are certain circumstances that will generally excuse a late filing or payment.

Excuses, Excuses
So, what cause is reasonable? Here are some IRS examples of generally acceptable excuses.

Records not available. For reasons beyond the taxpayer’s control, records necessary to compute the tax weren’t obtainable.

Late delivery. While the taxpayer mailed the return or payment in time to reach the IRS by the deadline, through no fault of his own, it was delivered late.

Bad IRS information. The taxpayer failed to timely file the return or pay the tax after receiving erroneous information from an IRS employee, or the necessary forms and instructions weren’t provided by the IRS in time, despite a timely request.

Records destroyed. The taxpayer’s residence, place of business, or business records were destroyed due to a fire, other casualty, or civil disturbance.

Death. The death or serious illness of the taxpayer or a member of his or her immediate family occurred. Where the taxpayer is a corporation, estate, trust, or the like, the individual affected must be the person who has sole responsibility for executing the return or making the deposit or payment, or is a member of that person’s immediate family.

Absence. The taxpayer is unavoidably absent. Again, in the case of a corporation, estate, trust, etc., the absent person must have had sole responsibility for executing the return or making the deposit or payment.

IRS fumble. The taxpayer can prove that she personally visited an IRS office before the filing date to get information or aid to make out the return and, through no fault of her own, was unable to meet with an IRS representative.

How can she prove that she was there and did not see someone? Presumably, she does so by the testimony of the person she didn’t see. This tactic is what the lawyers call “proving a negative.” I don’t recommend it. Death or serious injury is more persuasive.

Bad advice from a good source. The taxpayer relied on the incorrect advice of a competent tax professional, who used normal prudence in determining whether further advice was needed and, as a result, came to the conclusion that a return was not required.

High Court Rules on Reasonable Cause
Is there reasonable cause that excuses a penalty when a taxpayer relies on an attorney or accountant to make a timely filing? No, according to a decision by the US Supreme Court.

It all began when Robert Boyle was appointed executor for the estate of his mother. Although Boyle lacked experience in estate taxes, he had previously acted as executor for the estate of his father.

The attorney whom Boyle hired to handle the legal work for his mother’s estate told him of the need to file an estate tax return, but didn’t tell him the due date for the return. He provided the attorney with all relevant records and asked several times about the return. The attorney assured Boyle that it would be prepared and filed “in plenty of time.” Unfortunately for Boyle, a clerical oversight caused the attorney to miss the nine-month deadline by three months, an oversight that led to a late-filing penalty of $17,000.

The 7th Circuit Court of Appeals agreed with Boyle that he should be held blameless. Reliance on one’s attorney to do the job on time, said the appeals court, is reasonable cause for an overdue return when the taxpayer:

  • Is unfamiliar with the tax law.
  • Makes full disclosure of all relevant facts to the attorney who he relies on and maintains contact with the attorney from time to time during the administration of the estate.
  • Has otherwise exercised ordinary business care and prudence.

But Boyle struck out with the Supreme Court. It unanimously concluded that the taxpayer is stuck with the penalty even when an attorney causes the delay. Congress chose to place the burden of complying with filing deadlines on the taxpayer, not on an attorney or accountant or some other agent or employee of the taxpayer:

“One need not be a tax expert to know that returns have fixed filing dates and that taxes must be paid when they become due,” the high court pointed out.

To be on the safe side, the executor or administrator of an estate should ask the lawyer or accountant early and often when federal returns have to be filed and how they’re progressing. It’s also wise to inquire about state returns.

There’s a rose in this bed of thorns. The Supreme Court noted that a different issue arises when a taxpayer relies on the advice of a lawyer or other professional on a question of tax law, such as whether a liability exists. It’s reasonable for a client to rely on such advice, though it proves erroneous.

“Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a ‘second opinion,’ or to try to monitor counsel on the provisions of the Internal Revenue Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place,” the justices concluded.

So, a taxpayer is on fairly safe ground when she relies on the advice of a tax expert that a return needn’t be filed. If it turns out that her tax pro goofed, odds are that the IRS will be forgiving.

For instance, the Tax Court refused to approve assessment of a penalty for late filing of an estate tax return where an executrix was erroneously advised by her attorney that no return was due until a dispute between her and a beneficiary was resolved.

Additionalarticles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 150 and counting).

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Also be mindful of the articles when you strive to build name recognition, a goal attainable only by choosing and implementing strategies that set you apart from ferocious competition. Use the articles to prepare talks to audiences, such as business owners, investors, and retirees.