The case of Intress v. United States, No. 3:18-cv-00851 (M.D. Tenn. 2019) again raises the question of Boyle in an electronic era. Does e-filing have the ability to change the outcome in Boyle? According to the district court in this case, it does not.
We have traveled this road before. Last year Les wrote an excellent post on the Spottiswood v United States case in which the District Court for the Northern District of California held that a taxpayer who attempted to e-file his return a few days before the filing deadline but who incorrectly entered his child’s Social Security number was responsible for a late filing penalty. That post contains links to a couple of other relevant posts and to submissions I helped to draft on behalf of the ABA Tax Section as part of its annual meeting with the Commissioner in which Tax Section raised this issue to the IRS because people are being penalized for filing electronically in situations in which the IRS would not impose penalties for paper filing. That post also contains a link to the amicus brief filed in the Haynes case, discussed below, by the American College of Tax Counsel (ACTC). Since the IRS has encouraged people to e-file for the past two decades, it seems odd that it would impose stricter penalties and cite to Boyle if it really wants to encourage e-filing. Seems like it’s time for rethinking the situation.
According to the decision Kristen Intress and Patrick Steffen are a “marital community” in Tennessee. They brought a refund action seeking to recover a late filing penalty imposed on them with respect to their 2014 return. The penalty amount here, $120,607.27, makes it worth the fight. At the time of the filing deadline for their 2014 return taxpayers were out of the country. Their preparer sought to file a request for an automatic extension and queued up the extension document using her e-file software; however, she failed to hit send. The taxpayers, and the preparer, did not discover the error until October. Of course, by that time the return had already amassed the maximum failure to file penalty.
They paid the penalty, and requested a refund arguing that they met the dual requirements for abatement – reasonable cause and lack of willful neglect. They argued that reliance on their return preparer to make the request for the automatic extension was reasonable; however, that argument runs right into Boyle. So, they additionally argued that Boyle in its stark black and white view of the world should not apply to an e-filing situation in the same way it did in the 1980s.
The district court finds their position at odds with Boyle and states that their argument that Boyle does not govern e-filed returns “presents a novel legal question – one not previously addressed squarely by the federal courts.” Citing Haynes v. United States, 760 F. App’x 324, 326 (5th Cir. 2019). Haynes squarely raised a Boyle question but did not decide it.
In Haynes, the 5th Circuit described the facts as follows:
“On October 17, 2011, the last day of a six-month filing extension, John Dunbar, a certified public accountant and paid tax preparer, electronically transmitted the Hayneses’ Form 1040 income tax return, which he had prepared, to Lacerte Software Corporation for filing with the IRS. Later that day, Dunbar notified Mr. Haynes that the 2010 return had been timely filed. Ten months later, however, on August 20, 2012, the Hayneses received an overdue-return notice from the IRS for the 2010 tax year.
In response to the Hayneses’ resulting inquiry, Dunbar ultimately determined that, on October 17, 2011, Lacerte accepted the electronically submitted return and timely transmitted it to the IRS. Nevertheless, the IRS rejected the return because Ms. Haynes’s Social Security Number erroneously appeared on the line designated for an employment-identification number. For reasons unknown, the Hayneses did not receive a rejection notice from the IRS, Dunbar, or Lacerte prior to the August 2012 notice of nonpayment.”
Haynes pushes the problem of the mistake further down the line because of the way e-filing works. Haynes handed off to the CPA who handed off to the transmitter who handed off to the IRS. Somewhere between the transmitter and the IRS the problem occurred but no one got back to either the CPA or the Hayneses to notify them of the botched handoff. What responsibilities do the parties bear to insure that the document made it successfully to the IRS in the absence of notice that it did not arrive? Once they learned of the failure of transmittal the Hayneses immediately filed a paper return; however, because this occurred 10 months after the extended due date the IRS hit them with the late filing penalty.
Under the facts here the 5th Circuit sidesteps the decision regarding the application of Boyle in an e-filing era stating;
“While the e-filing issue is an interesting one, it is one that we need not decide today. Even if the Government is right that Boyle should apply to e-filing, another genuine dispute of material fact—laid out in the next section— still defeats summary judgment. Consequently, we take no position on whether a taxpayer’s reliance on a CPA to e-file a tax return, by itself, constitutes reasonable cause.”
The case arrived at the 5th Circuit after the lower court granted summary judgment to the IRS; however, the 5th Circuit said this case presents a different factual situation than Boyle. In Boyle, the preparer put the wrong due date on his calendar and everyone agreed that the mistake belonged to the preparer. Here, the preparer timely and properly filed the return but did not follow up when he did not receive a notice confirming receipt. The fact, the duty to follow up after an electronic transmission, creates a different situation than Boyle, requiring the trier of fact to determine, after testimony, whether the duty to follow up has the same consequence as the duty to get the date right in the first place.
After the 5th Circuit’s opinion the Department of Justice Tax Division sent a letter to the court notifying the court that the case was moot because the government conceded the case and refunded the money paid by the Hayneses to them. Of course, the letter does not provide details of why the government conceded this case but it is clear from subsequent events it has not conceded the issue. Thereafter, the Hayneses sought attorneys’ fees but that effort failed, though the government did pay court costs.
In addition to citing Haynes, the district court also cited to the National Taxpayer Advocate’s 2018 annual report to Congress where she discussed this issue. Having looked at the relevant cases and discussions swirling around the issue of Boyle’s continued viability in very different e-filing world that now exists, the court holds for the IRS and applies Boyle to prevent relief but states that its “conclusion is neither axiomatic nor self-evident, and is worthy of analysis.”
While agreeing that the landscape for filing returns has changed drastically since the Boyle decision, the district court finds commonality between petitioners’ situation and Boyle in that “taxpayers are not obligated to use tax preparation services.” The taxpayer controls which preparer to hire and the decision of whether to file using a paper return. While the IRS has encouraged e-filing and while most taxpayers do e-file, taxpayers may still file using paper just as they could when the Supreme Court decided Boyle. The court states that if the IRS gets to the point of requiring everyone to e-file taxpayers’ argument would become more plausible.
The court then finds that even if taxpayers could get past the Boyle issue, they would still need to show reasonable reliance on the return preparer. They should show they took reasonable steps to check to make sure the extension was received but they showed nothing of this sort. The record did not indicate that the taxpayers made any effort to verify the filing of the extension request.
This will not be the last case on late e-filing and the Boyle case. Last month ACTC wrote a letter to the IRS Chief Counsel urging him to revise the rules that apply to e-filing. The letter does an excellent job of setting out three possible solutions to the application of the bright line rule in Boyle to the e-filing situation: 1) the IRS should not apply the bright line test to e-filed returns; 2) the IRS should require the ERO to notify the taxpayer of the acceptance or rejection of the e-filed return within a reasonable time after the e-filing and 3) the IRS should implement a systemic first time abatement program. (The Intress case does not discuss first time abatement which is an administrative program rather than a basis for courts to grant relief.
The situation needs to change. The IRS understandably does not want to go back to the slippery slope that existed before Boyle with taxpayers (and their representatives/preparers who are themselves frequently on the line for malpractice in these cases) pleading for relief because of the special circumstances that caused the late filing of the return. It’s a lot easier to send them away with the bright line rule of Boyle. Yet, the notification issues and the mismatch issues that really do not impact the viability of the document as a return need recognition. In Intress, the facts are not as favorable to the taxpayers as in Haynes and some of the other situations. Here, the preparer screwed up by not pressing send. No part of the fault for the late return lies at the doorstep of the IRS. Yet, even here, the situation cries out for relief. The ACTC has made some good proposals, the NTA has made some good proposals, and the ABA Tax Section has made some good proposals. It’s time for the IRS to make some decent counterproposals to try to work out this problem administratively with new procedures and regulations. It’s time for Congress to step in to help them by passing laws governing the imposition of penalties in the e-filing setting that match the circumstances. Both taxpayers and practitioners need to know their responsibilities as we continue to encourage e-filing.