Question: My accountant failed to timely file my income tax return through the e-filing system and I was assessed late filing and late payment penalties by the IRS. Can I get these penalties abated?
Answer: Absent other compelling circumstances, you cannot get penalties abated for the late filing of your income tax returns and the accompanying late payments. Under the circumstances described, you will have to pay these penalties to the IRS.
The Internal Revenue Code assesses various penalties on taxpayers who fail to comply with the tax filing system and the payment process. Penalties are imposed on taxpayers who do not timely file and pay their income and other tax obligations. Penalties can be abated if the failure to timely file and pay is due to reasonable cause. The longstanding rule of law is based on a 1985 United States Supreme Court decision that reliance on a professional or other agent does not constitute a defense to the penalties imposed. While the result in many cases is harsh, taxpayers must nevertheless bear the cost of late filed returns and non-timely payments.
A recent U.S. Court of Appeals case addresses the reasonable cause defense for taxpayers failing to file returns pursuant to the e-filing process. Most tax return preparers are required to file taxpayers’ income tax returns electronically after receiving written direction from the taxpayers to file the returns. Prior to the mandate that tax return preparers e-file income tax returns, tax preparers routinely sent completed income tax returns to taxpayers for review and filing. Because of the mandated e-filing required of most tax return preparers, the obligation of timely filing now rests to a large extent on tax return preparers.
In the recent Court of Appeals case, the taxpayer maintained that he should not be responsible for the failure of his return to be filed electronically claiming he sent timely authorization to his accountant directing the filing of his income tax return. The Court of Appeals refused to distinguish between returns taxpayers filed themselves and those returns filed electronically where authorization was timely provided to the tax preparer. Regretfully, taxpayers whose preparers do not follow the authorization and fail to timely file returns are left with an obligation to pay the assessed penalties for errors they arguably did not commit.
Since taxpayers are relying on their preparers to file their returns, this leaves open the question as to what a taxpayer should be doing where the taxpayer’s return is required to be filed electronically, authorization has been provided to the preparer and the preparer fails to timely file the return. The Court of Appeals concluded that taxpayers can follow up with the IRS to ensure that their income tax returns are timely filed. Taxpayers can also inquire as to whether their preparers have the proper software to e-file their returns. Finally, taxpayers have the option of taking back the returns prepared by their preparers and personally mailing them to the IRS.
The Court of Appeals took a hardline approach to the reasonable cause exception, perhaps moreso from a policy standpoint than for any other reason. The court seemed reluctant to extend the reasonable cause protection to a taxpayer who provides written authorization to a tax return preparer where the preparer fails to follow the direction. Regardless, as far as the government goes, you will be left with the obligation of having to pay the late filing and payment penalties. You, of course, likely have recourse against your tax return preparer for failing to exercise due care in filing your returns which may provide you with the relief you are seeking.
Please contact Bruce Bell with any questions at (312) 648-2300 or e-mail at [email protected].
