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Are E-Filed Tax Returns Subject to the Same Late Filing Rules as Paper Tax Returns?

By Joel N. Crouch on July 17, 2018

On July 11th, the 5th Circuit Court of Appeals heard arguments in Haynes v. United States regarding the application of a late filing penalty to an electronically filed tax return that was filed late due to a computer software malfunction. The question before the 5th Circuit is whether the U.S. Supreme Court decision in U.S. v. Boyle is still valid law in the age of electronic filing of tax returns.

U.S. v. Boyle involved an estate tax return that was filed three months late due to a clerical oversight by the attorney hired to prepare and file the return. The IRS assessed a late filing penalty, although the executor of the estate had inquired of the attorney from time to time as to the preparation of the return and was assured that it would be filed on time. The taxpayer paid the penalty and filed a suit in federal district court for a refund, contending that the penalty was unjustified because his failure to file the return on time was "due to reasonable cause," i.e., reliance on his attorney. The district court agreed and granted summary judgment for the taxpayer which the Court of Appeals affirmed.

In reversing the trial court’s decision, the U.S. Supreme Court said “when an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. 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 Code himself, would nullify the very purpose of seeking the advice of a presumed expert in the first place…. By contrast, one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due. In short, tax returns imply deadlines. Reliance by a lay person on a lawyer is of course common; but that reliance cannot function as a substitute for compliance with an unambiguous statute.”

In Haynes, a CPA e-filed the taxpayers’ 2010 tax return that was subsequently rejected by the IRS due to an error code. The taxpayers did not become aware that the e-filed return had been rejected until one year later when they received a letter from the IRS telling them that their tax return was overdue. The taxpayers immediately filed a paper tax return and the IRS assessed a late filing penalty which the taxpayers paid. After their claim for refund was denied by the IRS, the taxpayers filed suit in federal district court. The court, citing Boyle, said the taxpayers’ reliance on tax professional was not a “reasonable cause” for late filing because the use of a tax professional did not relieve the taxpayer of a duty to meet a deadline.

On appeal, the taxpayers and a group of attorneys who filed an amicus brief argued that the couple should not be subject to the penalties because electronic tax return filings should not be held to the same standard as paper filings to which Boyle applies, because the IRS is urging most taxpayers to file electronically and the Boyle decision did not comprehend the future complexities of e-filing. A paper tax return requires no special training or effort, while e-filing entails specific training and tools, and has a third-party authorized provider in the transaction. There is no readily available mechanism for a taxpayer to personally verify the IRS’ receipt of the return in a timely manner. Even the government agreed that, if the taxpayers had filed a paper tax return instead of an e-filed return, the tax return would not have been rejected and there would be no late filing penalty.

The taxpayers argued that an e-filing should be valid when the taxpayer reasonably relies on an IRS-authorized third-party transmission and the tax return follows previously enumerated factors including supplying sufficient information for the IRS to calculate tax liability purporting to be a tax return, making an honest attempt to comply with tax laws, and being executed under penalty of perjury.

A decision from the 5th Circuit is expected later this year, but whatever the outcome, it is likely the issue is headed to the U.S. Supreme Court.

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