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A New Court Decision on E-Filed Tax Returns and the Failure to File Penalty

By Joel N. Crouch on August 8, 2019

In prior blog posts (here) and (here), I discussed the application of the IRC Section 6651 failure-to-file penalty to an electronically-filed tax return. On August 2nd, a U.S. District Court in Tennessee took on the issue directly and ruled against a taxpayer holding that the U.S. Supreme Court decision in United States v. Boyle is applicable even when the tax return is filed electronically.

Kristin Intress and Patrick Steffen, wife and husband (“Plaintiffs), hired a professional tax preparer to file their 2014 Form 1040.  Plaintiffs were out of the country around April 15, 2015 and asked the preparer to file an extension.  On April 15th, the return preparer completed the Form 4868, Application for Automatic Extension of Time  to File U.S. Individual Tax Return, for filing and queued up the document through e-file software.  However, the preparer mistakenly failed to hit “send” and the Form 4868 was never received by the IRS.  The error was discovered in October 2015 when the preparer was filing the Plaintiffs’ tax return.  Thereafter, the IRS assessed a $120,607.27 failure-to-file penalty which the Plaintiffs paid after exhausting their administrative remedies.  In March 2017, Plaintiffs filed a Form 843 asking the IRS to abate and refund the penalty amount.  After the IRS denied the request to abate and refund, the Plaintiffs filed a refund suit in U.S. District Court claiming the penalty should be abated because the Plaintiffs acted with reasonable cause in relying on the paid return preparer and there was no willful neglect.  The Plaintiffs argued that the Boyle holding is inapplicable to the modern IRS e-filing system, because it was decided in an era of exclusively paper tax filing.  In Boyle, the U.S. Supreme Court held that a taxpayer has a non-delegable duty to comply with a deadline and cannot simply rely on his advisor to do so.

Although the judge seemed to be sympathetic to the Plaintiffs’ situation in the Tennessee case, he ruled in the government’s favor.  The court said that, although most tax returns are filed electronically, “taxpayers are not obligated to use tax preparation services.  Even if certain classes of tax return preparers are now required to use e-file software, it is just as true today as it was in 1985 that a person… can prepare returns personally … and an individual filing his own return is not required to use e-file software…[t]he decision to use [a return preparer required to use e-file software]  is within the taxpayer’s control.”  The court added that the Plaintiffs’ legal theory “will be much more plausible if and when the IRS requires all returns to be e-filed or the paper filing process becomes so cumbersome as to transcend ‘ordinary business care and prudence.’”  In denying the Plaintiffs’ claim that the IRS should have abated the penalty under the First Time Abatement program, the court noted that the program is a form of administrative, not judicial, relief. 

As discussed in the earlier blog posts, the same issue was before the court in Haynes v. United States.  In Haynes, the government prevailed at the district court and the taxpayer appealed the decision to the 5th Circuit.  When the case was returned to the district court by the 5th Circuit for additional consideration, the IRS unilaterally refunded the penalty to the taxpayers.  It would not be surprising if the taxpayers in the Tennessee case appeal the decision against them, so this is probably not the end of the story.

For any questions on this or any other tax-related matters, please feel free to contact me at (214) 749-2456 or jcrouch@meadowscollier.com.