Late-Filing Penalties, Reasonable Cause, & Boyle
By Matthew L. Roberts on May 14, 2025
-
Matthew L. Roberts
View Bio
There are more than 100 penalties in the Internal Revenue Code. Each penalty varies in scope, but a common defense for almost all of them is “reasonable cause.” Where this defense applies, the IRS can’t impose penalties.
Generally, taxpayers prove reasonable cause by detailing facts and circumstances that show they acted with ordinary business care and prudence, notwithstanding the compliance failure. Common examples of reasonable cause include death or serious illness of the taxpayer or an immediate family member, natural disasters, and reliance on a tax professional. In determining whether a taxpayer meets the reasonable cause standard, IRS examiners are instructed to review the taxpayer’s reason for the noncompliance, the taxpayer’s compliance history (at least the last three years), the length of time it took the taxpayer to regain compliance, and whether or not the taxpayer could have anticipated the event that caused the noncompliance.
In some instances, taxpayers can’t raise the reasonable cause defense as a matter of law. For example, in U.S. v. Boyle, 469 U.S. 241 (1985), the Supreme Court held that taxpayers can’t use reasonable cause as a defense for a late-filing penalty if the taxpayer merely relied on a tax professional to file the return. However, Boyle indicated that reliance on a tax professional concerning whether a return should be filed at all could fall squarely within reasonable cause.
Given the differing outcomes, it is not surprising that the IRS often contends that taxpayers are, in effect, arguing that they relied on a tax professional to timely file a return. Equally unsurprising are counter arguments from taxpayers in these circumstances that they relied on the tax professional’s judgment and not the act of filing. Two recent court decisions illustrate these arguments well.
Dealers Auto Auction of SW LLC v. Commissioner
In Dealers Auto, the taxpayer argued that it should not be liable for late-filing penalties associated with IRS Forms 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. The IRS had assessed these same penalties against Dealers Auto in a prior year and, as a result, the company had purchased tax preparation software that was designed to assist it with its IRS Forms 8300 filing obligations. During the Tax Court proceedings, Dealers Auto contended that it had reasonable cause for the late-filed information returns because the tax software malfunctioned.
Relying on Boyle, the IRS argued that the penalties were appropriate because there was no significant difference between relying on a human tax professional versus a computer to file the information returns. The Tax Court disagreed, at least in part, noting that a taxpayer could satisfy its burden to show reasonable cause if it could demonstrate a computer malfunction or technological failure that caused the late filing through no fault of the taxpayer.
Unfortunately, Dealers Auto won the battle but lost the war. After determining a reasonable cause defense for a computer malfunction could apply, the court determined that the company had failed to provide sufficient proof that the tax software malfunction caused the late filing.
Murphy v. United States
In Murphy v. United States, No. 1:24-cv-00260 (E.D. Cal. Feb. 18, 2025), a surviving spouse brought a refund suit against the government for its failure to refund penalties due to reasonable cause. In that case, Murphy and her husband created a grantor trust, which upon her husband’s death, became a non-grantor trust. Although Murphy, as trustee of the trust, was required to file IRS Forms 1041 after her husband’s death to account for the change, she continued to report the trust activities on her personal return as she had historically done prior to her husband’s death.
Eventually, a tax professional discovered the filing errors, prompting Murphy to go back and file late IRS Forms 1041. After the IRS received the late trust tax returns, it imposed late-filing penalties. Murphy challenged the penalties and argued that she had relied on her long-time tax professional to advise her of the new filing requirements after her husband’s death. When the IRS disagreed, the parties moved the matter to litigation in federal court.
The government moved to have Murphy’s reasonable cause arguments dismissed entirely from the lawsuit. In support, the government cited Boyle, arguing that she merely relied on her tax professional to file the returns. The court disagreed with the government’s characterization of Murphy’s reasonable cause defense. Specifically, the court found that Murphy, who was not a tax professional, had no reason to know of the new filing obligations when her husband passed away. In addition, the court found significant that: (i) the income from the trust had been reported, albeit on the improper forms; (ii) the tax preparer had prepared Murphy’s returns for fifteen years prior to the missed filings, causing Murphy to reasonably rely on his professional judgment; and (iii) Murphy had notified the tax preparer of her husband’s death, which should have put the preparer on notice of the required IRS Forms 1041.
Summary
Taxpayers who contest late-filing penalties should be aware that the government usually raises Boyle as it did in Dealers Auto and Murphy. Where appropriate, taxpayers should attempt to distinguish between reliance on a tax professional to file a return by a filing deadline (not reasonable cause) and reliance on a tax professional to advise on the necessity of a certain filing obligation (potentially reasonable cause).
If you have any questions on reasonable cause defenses or any other civil or criminal tax issue, you can contact Mr. Roberts at mroberts@meadowscollier.com or 214.749.2434.
Generally, taxpayers prove reasonable cause by detailing facts and circumstances that show they acted with ordinary business care and prudence, notwithstanding the compliance failure. Common examples of reasonable cause include death or serious illness of the taxpayer or an immediate family member, natural disasters, and reliance on a tax professional. In determining whether a taxpayer meets the reasonable cause standard, IRS examiners are instructed to review the taxpayer’s reason for the noncompliance, the taxpayer’s compliance history (at least the last three years), the length of time it took the taxpayer to regain compliance, and whether or not the taxpayer could have anticipated the event that caused the noncompliance.
In some instances, taxpayers can’t raise the reasonable cause defense as a matter of law. For example, in U.S. v. Boyle, 469 U.S. 241 (1985), the Supreme Court held that taxpayers can’t use reasonable cause as a defense for a late-filing penalty if the taxpayer merely relied on a tax professional to file the return. However, Boyle indicated that reliance on a tax professional concerning whether a return should be filed at all could fall squarely within reasonable cause.
Given the differing outcomes, it is not surprising that the IRS often contends that taxpayers are, in effect, arguing that they relied on a tax professional to timely file a return. Equally unsurprising are counter arguments from taxpayers in these circumstances that they relied on the tax professional’s judgment and not the act of filing. Two recent court decisions illustrate these arguments well.
Dealers Auto Auction of SW LLC v. Commissioner
In Dealers Auto, the taxpayer argued that it should not be liable for late-filing penalties associated with IRS Forms 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. The IRS had assessed these same penalties against Dealers Auto in a prior year and, as a result, the company had purchased tax preparation software that was designed to assist it with its IRS Forms 8300 filing obligations. During the Tax Court proceedings, Dealers Auto contended that it had reasonable cause for the late-filed information returns because the tax software malfunctioned.
Relying on Boyle, the IRS argued that the penalties were appropriate because there was no significant difference between relying on a human tax professional versus a computer to file the information returns. The Tax Court disagreed, at least in part, noting that a taxpayer could satisfy its burden to show reasonable cause if it could demonstrate a computer malfunction or technological failure that caused the late filing through no fault of the taxpayer.
Unfortunately, Dealers Auto won the battle but lost the war. After determining a reasonable cause defense for a computer malfunction could apply, the court determined that the company had failed to provide sufficient proof that the tax software malfunction caused the late filing.
Murphy v. United States
In Murphy v. United States, No. 1:24-cv-00260 (E.D. Cal. Feb. 18, 2025), a surviving spouse brought a refund suit against the government for its failure to refund penalties due to reasonable cause. In that case, Murphy and her husband created a grantor trust, which upon her husband’s death, became a non-grantor trust. Although Murphy, as trustee of the trust, was required to file IRS Forms 1041 after her husband’s death to account for the change, she continued to report the trust activities on her personal return as she had historically done prior to her husband’s death.
Eventually, a tax professional discovered the filing errors, prompting Murphy to go back and file late IRS Forms 1041. After the IRS received the late trust tax returns, it imposed late-filing penalties. Murphy challenged the penalties and argued that she had relied on her long-time tax professional to advise her of the new filing requirements after her husband’s death. When the IRS disagreed, the parties moved the matter to litigation in federal court.
The government moved to have Murphy’s reasonable cause arguments dismissed entirely from the lawsuit. In support, the government cited Boyle, arguing that she merely relied on her tax professional to file the returns. The court disagreed with the government’s characterization of Murphy’s reasonable cause defense. Specifically, the court found that Murphy, who was not a tax professional, had no reason to know of the new filing obligations when her husband passed away. In addition, the court found significant that: (i) the income from the trust had been reported, albeit on the improper forms; (ii) the tax preparer had prepared Murphy’s returns for fifteen years prior to the missed filings, causing Murphy to reasonably rely on his professional judgment; and (iii) Murphy had notified the tax preparer of her husband’s death, which should have put the preparer on notice of the required IRS Forms 1041.
Summary
Taxpayers who contest late-filing penalties should be aware that the government usually raises Boyle as it did in Dealers Auto and Murphy. Where appropriate, taxpayers should attempt to distinguish between reliance on a tax professional to file a return by a filing deadline (not reasonable cause) and reliance on a tax professional to advise on the necessity of a certain filing obligation (potentially reasonable cause).
If you have any questions on reasonable cause defenses or any other civil or criminal tax issue, you can contact Mr. Roberts at mroberts@meadowscollier.com or 214.749.2434.
