The Fifth Circuit in March 2019 raised, but did not answer, the question of whether it was still appropriate to hold that taxpayers could not reasonably rely on a return preparer for timely filing of a return in the age of electronic filing.[1]  A U.S. District in Court in Tennessee decided that, since taxpayers could prepare their own paper return or obtain paper returns from the preparer, the prior rule should continue to apply.[2]  The Court also held that the taxpayer could not seek first-time abatement (FTA) relief in Court—rather, that is fully under the IRS’s control.

The US Supreme Court held in the Boyle case[3] that a taxpayer could not establish reasonable cause for failing to file a tax return by claiming he/she relied upon a tax preparer to timely file the return.  The Court found that the duty required no special knowledge or skill to file a return (a trip to the Post Office or local IRS office) and, as such, could not be delegated to a third party—the taxpayer had a duty to insure the third party actually took the desired action.

In the case of Haynes v. United States,[4] the Fifth Circuit indicated that in the age of electronic filing it was possible that the Boyle standard no longer applied, and that it was possible a taxpayer could show reasonable care should a return failed to be filed electronically if the agent had acted reasonably. But the opinion stopped short of finding that was the case, sending the matter back to the District Court to look into the issue as was noted in the earlier discussion of that case when it came out on the Current Federal Tax Developments website.[5]

In this case before the U.S. District Court in Tennessee, a married couple had engaged a preparer to obtain an extension of time to file their 2014 income tax return, as they were out of the country when the filing deadline arrived.  The preparer obtained the necessary information from the taxpayers and prepared an electronic Form 4868 to obtain the extension.  She then got the document ready to be sent out for electronic filing, but failed to actually take the necessary step to transmit the extension request to the IRS, though she believed she had done so.[6]

Six months later, at the extended due date, the error was discovered.  The IRS assessed the taxpayers over $120,000 in late filing penalties.  The taxpayers exhausted all appeals, insisting the failure to timely file was not their fault, but the IRS refused to budge on the penalty.  The taxpayers paid the penalty, filed a claim for refund of the penalty (which was denied), and then filed suit in U.S. District Court.[7]

The taxpayers argued that they had reasonable cause as defined in IRC §6651(a)(1) for their failure to file the return, arguing that the Supreme Court’s reasoning in Boyle no longer should apply in the age of electronic filing.[8]

The Court noted that the issue of whether Boyle continued to apply for electronic filing had not yet been decided in a case:

Plaintiffs’ contention that Boyle does not govern electronic tax returns presents a novel legal question — one not previously addressed squarely by the federal courts. See Haynes v. United States, 760 F. App’x 324, 326 (5th Cir. 2019) (identifying e-filing question as unresolved before declining to address it); Nat’l Taxpayer Advoc., Fiscal Year 2018 Ann. Rep. to Congress, Most Litigated Issues at 514 (2019) (noting Haynes leaves open possibility of e-filing exception to Boyle). While the Court ultimately agrees with Defendant’s position that Boyle applies here, and thus prohibits a finding of reasonable cause in this case, that conclusion is neither axiomatic nor self-evident, and is worthy of analysis.

The Court determines that while most return preparers may be required to electronically file a tax return prepared for a client if certain exceptions are not met, nothing requires the taxpayer to electronically file a return.  The Court notes that a taxpayer is not required to use a professional preparer (they could prepare their own return) and, even if the taxpayer does so, Rev. Proc. 2011-25 allows the taxpayer to request that the preparer prepare a return in paper form for filing.[9]

The Court concludes:

Because the same filing options that existed in 1985 (mailing a personally or professionally prepared return) still exist, there is no reason to believe the standard of “ordinary business care and prudence” regarding tax filing has shifted as Plaintiffs suggest. See (Doc. No. 18 at 4). Just as in 1985, “reliance by a lay person on an [agent] is of course common; but that reliance cannot function as a substitute for compliance with an unambiguous statute,” Boyle, 469 U.S. at 251.[10]

The Court notes that if things change, and the use of the methods available in 1985 is no longer a possible or reasonable option, it might be time to revisit Boyle—but that time is not now:

This is not to say the Court is blind to the trend towards e-filing and the difficulty that it could pose to Boyle’s application going forward. Plaintiffs’ theory will be much more plausible if and when the IRS requires all returns to be e-filed or paper filing process becomes so cumbersome as to transcend “ordinary business care and prudence.” At that point, the average taxpayer would be similarly situated to the taxpayer with disabilities in that reliance on an agent or intermediary for transmission of the electronic return would be required. But as of now, Count I fails to state a claim for relief.[11]

Some may wonder why first-time abatement didn’t work?  The taxpayers argued they should have been eligible for that even if Boyle applied, but the Court did not look into that area, as it is simply something found in an administrative policy guide of the IRS, agreeing with the IRS that the taxpayers could not take that issue to Court:

Additionally, Defendant is correct that the Internal Revenue Manual, as a policy guide to a governmental agency, does not entitle a taxpayer to judicial relief. See, e.g., (Doc. No. 25 at 3-4); Valen Mfg. Co. v. United States, 90 F.3d 1190, 1194 (6th Cir. 1996). Indeed, the case Plaintiffs cite for support also stands for this proposition. See Laidlaw v. Comm’r of Internal Revenue, 114 T.C.M. (CCH) 243 (T.C. 2017). There, the Tax Court agreed with the respondent that “first-time abatement procedures are a form of administrative, not judicial, relief.” Id. at 6, 8. The Internal Revenue Manual itself, in the first line describing the First Time Abate program, states “the IRS provides administrative relief from the following penalties . . .” IRM (emphasis added) 20.1.1.3.3.2.1 (11-21-2017). The proper forum for alleging improper application of IRS policy is with the IRS — not a court of law.[12]

We don’t know why the IRS had denied FTA relief—or, frankly, if FTA had even been requested by the taxpayers. The Court decided whatever the facts were, it was not a matter for the Court to look into.  First-time abatement (FTA) is governed by Internal Revenue Manual 20.1.1.3.3.2.1 (11-21-2017)[13] and is available for qualifying taxpayers for relief from the following penalties:

• Failure to file penalties under IRC §§6651(a)(1), 6698(a)(1) or 6699(a)(1);

• Failure to pay penalties under IRC §§6651(a)(2) and/or 6651(a)(3); and

• Failure to deposit penalties under IRC §6656.[14]

Generally, the taxpayer must also meet the following criteria:

• Have filed or filed for an extension of time to file all outstanding returns[15] (and cannot have a request to file a return outstanding from the IRS that has not been withdrawn);

• Have paid or made arrangements to pay (including via an installment agreement) all tax due;[16] and

• Has no penalties (aside from an estimated tax penalty) for the prior 3 years.[17]

Additional criteria and details with regard to the penalty can be found in the IRM 20.1.1.3.3.2.1.  The AICPA also has a website article on the topic that was written August of 2018 that may be of use to practitioners not familiar with the program.[18]  AICPA Tax Section members are able to access a sample penalty abatement letter from that page as well.[19]

[1] Ed Zollars, “Fifth Circuit Remands Case for Determination if CPA Was Negligent in Not Determining Efiled Tax Return Had Not Been Accepted,” Current Federal Tax Developments website, March 31, 2019, https://www.currentfederaltaxdevelopments.com/blog/2019/3/31/fifth-circuit-remands-case-for-determination-if-cpa-was-negligent-in-not-determining-efiled-tax-return-had-not-been-accepted, retrieved August 7, 2019

[2] Intress v. United States, US DC Middle District Tennessee, Case No. 3:18-cv-00851, August 2, 2019, https://ecf.tnmd.uscourts.gov/doc1/16914318358, retrieved August 7, 2019 from Pacer (registration required)

[3] United States v. Boyle, 469 U.S. 241 (1985)

[4] Haynes v. United States, CA5, Case No. 17-50816, (2019)

[5] Ed Zollars, “Fifth Circuit Remands Case for Determination if CPA Was Negligent in Not Determining Efiled Tax Return Had Not Been Accepted,” Current Federal Tax Developments website, March 31, 2019, https://www.currentfederaltaxdevelopments.com/blog/2019/3/31/fifth-circuit-remands-case-for-determination-if-cpa-was-negligent-in-not-determining-efiled-tax-return-had-not-been-accepted, retrieved August 7, 2019

[6] Intress v. United States, US DC Middle District Tennessee, Case No. 3:18-cv-00851, August 2, 2019, https://ecf.tnmd.uscourts.gov/doc1/16914318358, retrieved August 7, 2019 from Pacer (registration required), p. 2

[7] Ibid

[8] Ibid, pp. 2-3

[9] Ibid, pp. 6-7

[10] Ibid, pp. 7-8

[11] Ibid, p. 9

[12] Ibid, p. 11

[13] https://www.irs.gov/irm/part20/irm_20-001-001r#idm140198826274112, retrieved August 7, 2019

[14] IRM 20.1.1.3.3.2.1, Section 1

[15] IRM 20.1.1.3.3.2.1, Section 2.a

[16] IRM 20.1.1.3.3.2.1, Section 2.b

[17] IRM 20.1.1.3.3.2.1, Section 4

[18] “IRS First-Time Penalty Abatement,” AICPA website, August 2, 2018, https://www.aicpa.org/interestareas/tax/resources/irsprocedureadministration/irspenaltyabatement.html, retrieved August 7, 2019

[19] https://www.aicpa.org/content/dam/aicpa/interestareas/tax/resources/irsprocedureadministration/downloadabledocuments/irs-letter-to-request-first-time-penalty-abatement.docx?contentType=secured, retrieved August 7, 2019 (AICPA Tax Section membership required)