CPA May Have Been Negligent in Failing to Follow Up After E-Filing Couple's Return

(Parker Tax Publishing February 2019)

The Fifth Circuit held that a district court erred in holding that a couple's reliance on their CPA to timely electronically file their tax return could not, as a matter of law, constitute reasonable cause to excuse a late filing under Code Sec. 6651. The Fifth Circuit reasoned that a question of material fact existed as to whether the CPA was negligent in failing to follow up on an electronic filing after receiving neither a confirmation that the taxpayers' return was accepted nor a notice of rejection. Haynes v. U.S., 2019 PTC 42 (5th Cir. 2019).

Background

On October 17, 2011, the last day of a six-month filing extension, John Dunbar, a CPA and paid tax preparer, electronically transmitted Christopher and Priscilla Haynes's 2010 Form 1040, which he had prepared, to Lacerte Software Corporation for filing with the IRS. Later that day, Dunbar notified Mr. Haynes that the return had been timely filed. In August of 2012, however, the Hayneses received an overdue return notice from the IRS.

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 Mr. Haynes's social security number erroneously appeared on the line designated for an employment identification number (EIN). For reasons unknown, the Hayneses did not receive a rejection notice from the IRS, Dunbar, or Lacerte prior to the August 2012 IRS notice.

To remedy the deficiency, the Hayneses filed a paper return. Once it was accepted, the IRS assessed a penalty. The Hayneses paid the penalty and then filed a request for abatement of it for reasonable cause. The IRS denied their request, and the Hayneses sued for the refund in a district court. The district court granted summary judgment for the government, deciding as a matter of law that the Hayneses' reliance on their CPA to timely electronically file their tax return could not constitute reasonable cause under Code Sec. 6651(a)(1). The Hayneses appealed to the Fifth Circuit.

Analysis

When taxpayers fail to timely file their tax returns, Code Sec. 6651 imposes a penalty that increases as time passes. To escape the penalty, the taxpayer bears the burden of proving that (1) the failure did not result from willful neglect and (2) was due to reasonable cause. Reasonable cause exists, according to Reg. Sec. 301.6651-1(c)(1), when the taxpayer demonstrates that he or she exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time. In U.S. v. Boyle, 469 U.S. 241 (1985), the Supreme Court held that, as a matter of law, reliance on an agent to file a tax return cannot, standing alone, constitute reasonable cause excusing a late filing. The Boyle case dealt with placing a paper tax return in the mail and was decided before electronic filing existed.

The Hayneses argued that the Boyle holding should be confined to the context of a paper filing. They contended that, due to the special software needed, filing a tax return electronically is fundamentally different from mailing a paper return. The government saw no problem with extending the bright line rule in Boyle to e-filing.

The Fifth Circuit vacated the district court's judgment and remanded the case, finding that a genuine dispute of material fact existed over whether Dunbar's actions could meet the reasonable cause standard. The Fifth Circuit explained that, while it found the e-filing issue to be an interesting one, it was one that it did not need to decide because, even if the government was right that Boyle should apply to e-filing, the factual issue of whether Dunbar was negligent defeated summary judgment. Thus, the Fifth Circuit took no position on whether a taxpayer's reliance on a CPA to e-file a tax return, by itself, constitutes reasonable cause.

The Fifth Circuit found that the Boyle decision depended on the fundamental agency rule that an agent's authorized actions are imputed to its principal. In Boyle, the court explained, no one disputed that the attorney negligently failed to mark the filing date on his calendar and did not file his client's tax return on time due to that slip up. Thus, under the normal agency rule, the client would be responsible for that negligence. The Fifth Circuit found that the client in Boyle attempted to escape that normal rule by arguing that reliance on his attorney to timely file his return was enough, standing alone, to constitute reasonable cause, but the Supreme Court rejected that assertion.

The Fifth Circuit found that, in contrast to the attorney in Boyle, it was not clear that Dunbar was negligent. On the one hand, the court found that Dunbar electronically submitted the Hayneses' return to the IRS prior to the expiration of the filing deadline. Nevertheless, the return was rejected because it had the wrong EIN. Yet for reasons unknown, a rejection notice pointing out the error was never sent to Dunbar; had it been, Dunbar could have easily cured the clerical error, the court found. On the other hand, the court noted that while Dunbar did not receive a rejection notice, neither did he receive an acceptance notice, nor did he proactively ensure that the IRS had accepted the Hayneses' return.

The Fifth Circuit found that whether it was reasonable for Dunbar to assume, based on the IRS's silence, that it had accepted the return or whether ordinary business care and prudence would demand that he personally contact the IRS to ensure acceptance was a genuine question of material fact for a jury to decide. Because Dunbar was the Hayneses' agent, if a jury determined that his actions met the reasonable cause standard, it would have to find the same to be true for the Hayneses - barring any determination of independent negligence by them, as principals are not only bound by their agents' failures but also by their diligence, the court explained. The Fifth Circuit concluded that this question of material fact made it unnecessary for it to decide whether a broad e-filing exception to the Boyle rule exists. That question, in the court's view, need only be answered if Dunbar, in fact, acted negligently; only then would the Hayneses be relegated to relying solely on their reliance on Dunbar to meet the reasonable cause standard, thereby teeing up the Boyle question.

For a discussion of abatement of penalties due to reasonable cause and acting in good faith, see Parker Tax ¶262,127.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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