In United States v. Boyle, the U.S. Supreme Court established the bright line rule that "reliance on an agent," without more, does not amount to "reasonable cause" for failure to file a tax return on time. Readers will recall prior blog posts regarding a 5th Circuit case, Haynes v. United States, where the reliance defense was at issue in an e-file situation. The Fifth Circuit never directly addressed the issue and the case ultimately settled. In Lee, the 11th Circuit addresses Boyle’s application to e-filings.
According to the 11th Circuit:
Wayne Lee, a Florida surgeon, hired CPA Kevin Walsh to prepare and file his federal income tax returns for 2014, 2015, and 2016. Because Walsh's firm, ATROX Partners, prepared and filed more than ten federal tax returns each year, Treasury Regulations deemed Walsh a "specified tax return preparer," requiring him to file all prepared returns on magnetic media (e.g., e-filing).
From 2014 to 2016, Walsh prepared Lee's tax returns. Each return claimed roughly one million dollars in gross income and showed six-figure overpayments, which Lee chose to apply to the following year's estimated tax. Every year, Lee reviewed the returns and signed IRS Form 8879, authorizing Walsh to e-file the returns on his behalf.
But Walsh never filed a single return. According to Lee, Walsh informed the IRS that ATROX's tax preparation software was incapable of preparing Lee's returns due to their complexity. Lee claims that Walsh never told him about this problem-he learned about it after an IRS agent visited his office on December 5, 2018. Lee received no letters from the IRS about the unfiled returns because his mailing address on file with the agency was incorrect. According to Lee, Walsh agreed to update Lee's mailing address with the IRS, but never did so.
Lee submitted the tax returns for 2014 through 2016 in December 2018. The lookback period for calculating Lee's credits therefore began in June 2015 (citation omitted). But Lee made no 2014 tax payments after April 2015, so the agency disallowed his 2014 overpayment of $288,409. Unable to benefit from the 2014 overpayment, Lee owed taxes for 2015 and 2016, as well as over seventy thousand dollars in failure-to-file and failure-to-pay penalties. In August 2019, Lee paid the IRS $289,183.14, which settled the outstanding tax liability and penalties.
Later, Lee sued ATROX and Walsh to recover damages caused by Walsh's negligent failure to file the tax returns at issue. That lawsuit settled in early 2020.
Lee also sued for a refund of his taxes and fees in the U.S. District Court for the Middle District of Florida. Lee claimed that reasonable cause excused the late filings due to his reliance on Walsh. The district court granted the government's summary judgment motion, concluding that Walsh's failure to file timely returns was not "reasonable cause" under Section 6651(a). Though Boyle did not mention electronic filing specifically, the district court concluded that Boyle's bright line rule applied to e-filed returns too.
Lee timely appealed.
In his appeal, Lee argued that he exercised ordinary business case and prudence “by retaining a CPA, reviewing his tax returns, signing Form 8879 ‘IRS e-file Signature Authorization’ each year and overpaying his taxes in 2014”. Lee argued that the failure to file was beyond his control after signing and sending the authorization to his CPA and that Congress had shifted the burden of e-filing to return preparers.
The 11th Circuit rejected all of Lee’s arguments and said the “duty to file tax returns on time lies with the taxpayer, not the agent, and it remains invariable whether e-filing or paper filing. Unfortunately, Lee blindly relied on his agent to his detriment”. The court said that Lee had a duty to obtain confirmation from the IRS that it received his returns, which he failed to do. The court also referenced Lee’s settlement of his negligence claims against Walsh and ATROX and said “Walsh may be liable to reimburse Lee for the damage his negligence has caused. But Walsh did not assume Lee’s legal duties to file timely tax returns and to pay the taxes. Walsh’s potential liability to Lee (which they have already litigated and settled ) does not extinguish Lee’s liability to the IRS”.
As one of the judges wrote in a concurring opinion, “taxpayers need to fully understand both the hidden dangers and available protections when relying on an agent to file their tax returns” and that taxpayers should be advised of their responsibilities in ensuring that the returns are filed.
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