The issue of when a taxpayer can be insulated from the imposition of civil penalties when the taxpayer depends and relies on the advice of a tax professional is an issue that we have discussed many times on PT and which fills many pages in the Saltzman Book treatise IRS Practice and Procedure. This month the American College of Tax Counsel (ACTC) filed an amicus brief in the Fifth Circuit case Haynes v US, which looks at the issue with a modern twist: can a taxpayer who uses an authorized e-filer expecting that the return be timely filed avoid a delinquency penalty if in fact there was an error in the processing of the e-filed return but the IRS or the preparer did not notify the taxpayer of the error until a couple of years passed and penalties accrued?
As many PT readers know, Boyle creates a bright line that prevents taxpayers from arguing reasonable cause based on good faith reliance on an advisor when it comes to meeting tax-filing deadlines. Boyle is a Reagan era case, well before today’s e-file world. The brief, which is exceptionally well done, explains that many e-file reject returns would clearly be accepted as returns under the Beard test if they were sent in via snail mail. The current e-file regime essentially makes it easy for rejects, as IRS has required taxpayers to identify prior year’s AGI or a special PIN to verify the return (a task not all are up for).
As I have discussed previously when IRS rejects an e-filed individual income tax return that cannot be rectified taxpayers “must file the paper return by the later of the due date of the return or ten calendar days after the date the IRS gives notification that it rejected the electronic portion of the return or that the return cannot be accepted for processing.” (as per the Handbook for Authorized E-file Providers of Individual Income Tax Returns). If there is no timely notification and little way for the taxpayer to independently check whether the return was rejected, it seems unfair to apply Boyle in these circumstances.
The ACTC brief (note: Keith and I are ACTC fellows though we did not participate in the drafting of the brief; Peter Connors of Orrick and Professor Jon Forman at Univ of Oklahoma Law School led the charge for ACTC ) makes the case much more forcefully. As the brief discusses, the act of e-filing is not nearly as simple as placing a paper return in the mail. Requiring a taxpayer to independently check to ensure that the return has been accepted, absent major developments in the so-called Future State of tax account information, seems to me unfair. By requiring a taxpayer to double check with the preparer or IRS to ensure that the e-filed return has been accepted places additional burdens on taxpayers using a preparer. If anyone should have that responsibility, it is the preparer, and a preparer who fails to ensure that the IRS has accepted the return should face the penalty music, not the taxpayer.
We will watch this case with interest and keep readers posted.