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“I Thought I Was Getting a Refund” is An Inadequate Excuse for Late Filing

Posted on Nov. 20, 2017

Parekh v Commissioner raises what I suspect to be a fairly common situation: a taxpayer believes that he is due a refund, and because of that belief may not file a tax return on time or even request an extension. Because the penalty for failing to file a timely tax return depends on the presence of a tax liability, if the taxpayer believes he is due a refund he may not feel the need to file by the April 15 deadline. (Of course, there still is a need to file a return, which serves both as an original return and as a refund claim, lest you blow the SOL on refunds, but that is another story and perhaps another blog post).

Sometimes, as in Parekh, the taxpayer is off on the calculations, and in fact does owe taxes. Parekh tees up the issue as to whether a taxpayer can have reasonable cause for not timely filing if the reason for the late (in this case 15-months late) filing is due to the taxpayer believing that it did not really matter because he thought he was getting money back from Uncle Sam.

Here are the facts, somewhat abbreviated. Parekh and his wife filed their 2012 return about 15 months late, and did not request an extension. IRS audited the return, and proposed an approximate $8,000 deficiency due to alternative minimum tax, which the original return did not calculate, as well as a $1,666 late filing penalty under 6651(a)(1). The Parekhs conceded the tax but disputed the penalty. Appeals had found no reasonable cause for the late filing, noting also that the taxpayers had a prior history of late filing and for good measure were late on subsequent returns (important as this likely  took them out of qualifying for the first time abatement, an issue Stephen has discussed before).

The taxpayer’s argument centered on his belief that there were no consequences for late filing a return that reflected a refund:

I figured, reasonably so I thought, that since I’d be getting a refund it was OK to file late * * * . In fact, I had considered the de facto deadline for filing to be three years if one is getting a refund since after that the refund is forfeited. As I take a quick look at some tax advice websites this is pretty much what they say. For example: “if they owe you a refund, the IRS really doesn’t care when you file. In fact, you have three years to file and still get your money.”

In 2012, however, they had an AMT liability due to a job switch and the unusual occurrence of distributions from retirement accounts associated with his former employer.   At trial, and as the opinion notes only after retaining an attorney, the husband also claimed that the late filing was due to frequent travel both to Oklahoma for his new job and on numerous trips to India to care for a sick parent.

This did not amount to reasonable cause. In getting to that conclusion, the opinion notes that at trial the husband agreed that the return was not complicated, and could have been prepared “in a day or two.”

The opinion lists some (not exhaustive) examples where a taxpayer was able to demonstrate that the delinquency was due to reasonable cause and not willful neglect:

  • unavoidable postal delays,
  • the timely filing of a return with the wrong IRS office,
  • the death or serious illness of a taxpayer or a member of his immediate family,
  • a taxpayer’s unavoidable absence from the United States, or
  • reliance on erroneous advice from a competent tax adviser or IRS officer.

The combination of past returns generating a refund and  some unexpected domestic and international travel due to job changes and family illness, especially when the current year was not complex, does not amount to reasonable cause:

Even if we were to credit petitioner husband’s testimony about his heavy travel schedule, it is inconceivable that he could not have found two days in which to fulfill petitioners’ filing obligation, as opposed to filing that return 15 months late. His response at trial–that “he didn’t think his tax return was something he had to do that very minute”–suggests that he did not take petitioners’ timely filing obligation seriously. (emphasis added). If petitioners truly intended to satisfy that obligation but were incommoded by problems suddenly arising in spring 2013 they could have requested an automatic six-month extension of time to file, as they eventually did for their 2014 taxable year. See sec. 6081. Their failure to request such an extension suggests, once again, that the real reason they filed late was their belief that the filing deadline did not matter because they were expecting a refund.

The moral of the story is that while sometimes it may not matter for penalty purposes if a taxpayer files late, the taxpayer should be sure that the return is going to generate a refund. In addition, the late filing of a return that has a liability raises the possibility that the taxes could not be discharged in bankruptcy, an issue Keith has flagged.Doing the math (or more likely plugging in the information on the software) before the fact can save a chunk of change and in some circuits preserve the potential for discharge.

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