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Taxpayer's Penalty Defense Gets Boyled (Boiled?)

By Joel N. Crouch on July 29, 2021
In previous blog posts I have discussed the late filing penalty and the reliance on a tax professional defense to the penalty. We discussed the reliance defense with respect to a late estate tax return (HERE) and (HERE) and with respect to late e-filed returns (HERE), (HERE) and (HERE) .

In a recent case, Lindsay v. United States , the 5th Circuit found that a taxpayer’s defense to the late filing penalty failed even though the taxpayer was incarcerated and his appointed power-of-attorney not only failed to file the taxpayer’s tax returns, he also embezzled hundreds of thousands of dollars from the taxpayer. The taxpayer, Jeffery Allen Lindsay, sued the IRS to recover penalties he paid for filing late tax returns and making late tax payments for the 2012-2015 tax years, claiming he was entitled to the “reasonable cause” exception to the penalties. Lindsay was serving his second term in prison from April 2013-June 2015. (Apparently, Lindsay had multiple run-ins with the law and had previously been in federal prison from 1996-2000). In May 2013, Lindsay executed a Power of Attorney (“POA”) appointing Keith Bertelson as his attorney in fact. The POA gave Bertelson complete control of Lindsay’s bank accounts and authority to manage Lindsay’s affairs. Lindsay directed Bertelson to file his tax returns and pay his taxes while he was incarcerated, and Bertelson assured Lindsay he was doing so. However, Bertelson not only failed to file Lindsay’s tax returns and pay Lindsay’s tax liability, he was embezzling hundreds of thousands of dollars from him. In April 2014, while still incarcerated, Lindsay discovered Bertelson’s malfeasance and revoked the POA. Lindsay then sued Bertelson for embezzlement and in 2015 he was awarded $705,414.61 in actual damages and $1 million in punitive damages.

When Lindsay was released from prison, he filed all the delinquent tax returns, paid the tax, interest and $425,307.98 in penalties. Thereafter, Lindsay filed a claim for refund for the penalties based on a reasonable-cause defense, which the IRS denied. Lindsay filed suit in federal district court arguing that his failure to file his tax returns and pay his taxes was due to reasonable cause and not willful neglect, due to his circumstances and reliance on Bertelson. He alleged that, considering his unusual circumstances, penalizing him for late filing and payments would go against equity and good conscience.

The IRS moved to dismiss for failure to state a claim upon which relief can be granted and, alternatively, for summary judgement. The motion relied on the US Supreme Court’s opinion in United States v. Boyle, and argued that a taxpayer is not entitled to the reasonable cause defense for late filings when he relies on an agent to file a timely tax return and the deadline for filing is ascertainable by the taxpayer.

In granting the government’s motion, the district court explained that while it was sympathetic to Lindsay’s specific circumstances, the “weight of authority indicates he has failed to state a claim upon which relief can be granted.” The court then discussed Boyle and other cases in ordering the dismissal of the case. Lindsay appealed the court’s order to the 5th Circuit Court of Appeals, which, once again, referenced Boyle and affirmed the district court’s order of dismissal.

For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.