Supreme Court's Boyle Decision Applies to E-Filed Returns

(Parker Tax Publishing February 2022)

A district court, relying on the Supreme Court's decision in Boyle v. U.S., 469 U.S. 241 (1985), held that a couple who trusted that their CPA would timely e-file their tax return extension request did not have reasonable cause for the subsequent late filing of their return by that CPA when the extension request was not timely e-filed. The court rejected the couple's argument that because a taxpayer cannot personally confirm that an accountant has e-filed a return as promised, the holding in Boyle does not apply to the e-filing of returns. Oosterwijk v. U.S., 2022 PTC 24 (D. Md. 2022).

Background

Erik and Aspasia Oosterwijk owned a meat stall in Baltimore's Broadway Market, which they grew into a thriving Fells Point meat wholesaler over the course of 24 years. In 2017, they sold the business, and the sale transaction complicated their taxes that year. As was the case for a decade, CPA Ernie Paszkiewicz of the accounting firm Gross, Mendelsohn, and Associates (Gross Mendelsohn) handled their taxes, including preparing and filing extension requests and income tax returns.

In the year the business was sold, Paszkiewicz and the Oosterwijks agreed that a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, would be filed. Paszkiewicz said he would e-file the extension request before the April 17, 2018, tax return deadline, and that the Oosterwijks' balance due of $1.8 million would be automatically debited from their bank account. The Oosterwijks made sure their account had enough funds for the payment, but April 17 came and went and the money remained in their account. The Oosterwijks emailed Paszkiewicz, who advised them to wait until April 30 to see if the payment had still not been deducted from their account, in which case he would contact the IRS.

On April 30, Paszkiewicz discovered that he had not actually e-filed the Oosterwijks' extension request. He then (incorrectly) advised the Oosterwijks that if they filed the six-month extension request at that moment, they would have until October 15, 2018, to file their 2017 tax return, and the penalties for late filing would halt. The Oosterwijks immediately mailed a paper Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and a check for $1.8 million to the IRS. About two months later, on June 29, 2018, the Oosterwijks e-filed their 2017 Form 1040.

The IRS assessed failure to file penalties under Code Sec. 6651(a)(1) totaling $274,634. The Oosterwijks requested penalty relief but the IRS denied their request. Paszkiewicz appealed the denial and the IRS Appeals Office agreed to an abatement. In March 2019, after several phone conversations with the IRS, the Oosterwijks sent a letter to the IRS memorializing one conversation and raising the issue of their reasonable cause defense for late filing due to Gross Mendelsohn's failure to e-file their extension request. They requested advice about how to halt the penalty accruals. In June 2019, the Oosterwijks paid the balance of the penalties they owed and then filed Form 843, Claim for Refund and Request for Abatement. After six months passed, the Oosterwijks took their case to a district court.

Under Code Sec. 6651, a late filing penalty applies to a taxpayer's failure to timely file a tax return unless the taxpayer's failure is due to reasonable cause and not due to willful neglect. In U.S. v. Boyle, 469 U.S. 241 (S. Ct. 1985), the Supreme Court held that taxpayers have an unambiguous duty to timely file tax returns and that an attorney's failure to timely file a return does not relieve the taxpayer of the duty to timely file a return. Some courts have interpreted Boyle to impose an independent duty for the taxpayer to ascertain and to comply with unambiguous deadlines, while others have limited Boyle to the narrower holding that, although reliance on an expert for ministerial tasks is insufficient to show reasonable cause, reliance on an expert to determine a deadline is sufficient. In a concurring opinion in Boyle, Justin Brennan reiterated that a taxpayer cannot avoid the penalty under Code Sec. 6651 merely by delegating his or her duty to a tax professional, but stressed that individuals with disabilities or infirmities that render them physically or mentally incapable of knowing, remembering, or complying with a filing deadline are exempt.

The Oosterwijks argued that under Boyle, they had reasonable cause for filing their individual tax return late because their accountant failed to e-file their extension request and their personal e-filing access was limited. They argued that the holding in Boyle does not apply to e-filing because a taxpayer cannot personally confirm that an accountant has e-filed as promised. Next, the Oosterwijks sought relief for the accrual of their penalties after April 2018. They said that if not for Paszkiewicz's bad advice, they would have immediately filed a return in April 2018 in order to halt the accrual. As a result, they claimed that they had reasonable cause for their late filings past the first month, in May and June 2018 - the months after Paszkiewicz's incorrect April 30 advice.

In a motion to dismiss, the government argued that the court did not have jurisdiction because the Oosterwijks' Form 843 did not adequately cover the factual bases and legal arguments raised in their lawsuit as required by the substantial variance rule under Code Sec. 7422(a). The government further argued that the late filing penalty is indivisible and that there is no reasonable cause exception for the accrual of a late filing penalty once it has been applied. According to the government, the penalty is assessed based on the state of affairs at the single moment of the filing deadline, and therefore there is no month-by-month evaluation of reasonable cause for the filing's lateness. The government further contended that even if there were monthly reevaluations of the reasonable cause exception, it did not apply in the instant case because Paszkiewicz's advice contradicted the Form 4868 instructions that a taxpayer must file the form by the due date of his or her return.

Analysis

The district court granted the government's motion to dismiss. First, the court held that it had jurisdiction over the case because the Oosterwijks' Form 843 was sufficient to put the IRS on notice that they alleged Code Sec. 6651(a) reasonable cause for their failure to file. The court said that a refund claim need not provide a perfectly detailed explanation of the taxpayer's legal theory regarding reasonable cause if it clearly states that the taxpayer seeks a refund for an improperly imposed penalty, calling for investigation into whether there truly existed reasonable cause for a late filing. The court therefore assumed that the substantial variance doctrine did not bar it from ruling on the Oosterwijks' claim that their failure to timely file was due to reasonable cause.

Next, the court rejected the Oosterwijks' argument that Paszkiewicz's e-filing failure gave them reasonable cause and found that Boyle controlled in this case. First, the court noted that the Oosterwijks were free to file their own extension request on paper. Second, the court found that the Boyle concurrence by Justice Brennan applies to differently abled taxpayers who are physically or mentally incapable of meeting a filing deadline and the Oosterwijks did not fall under that exception. The court observed that, although the outcome might change in a world of mandatory e-filing, the Oosterwijks had (and used) the option of paper filing, and their limited personal access to e-filing was not what the Boyle concurrence had in mind.

The court also rejected the Oosterwijks' argument that their penalties after the first month should be abated after finding that reasonable cause must exist on the date prescribed for payment in order for the exception to apply. The court noted that in cases such as Estate of Kwang Lee v. Comm'r, T.C. Memo. 2009-84, and Estate of La Meres v. Comm'r, 98 T.C. 294 (1992), reasonable cause was found based on erroneous advice that a second filing extension was available, which was given after the taxpayer's initial filing deadline had passed (but still within the deadline as extended from the first extension). But the court explained that the taxpayers in those cases were erroneously advised by their attorneys before their (first extended) deadlines had passed, meaning they could still have had reasonable cause under Code Sec. 6651. In contrast, the Oosterwijks received their erroneous advice after the deadline had passed and therefore after the door had closed on reasonable cause for late filing.

Finally, the court determined that even if the reasonable cause exception could be applied to the May and June 2018 penalties, the Oosterwijks were unreasonable to rely on Gross Mendelsohn's substantive legal advice that filing a late Form 4868 would halt the accrual of the late filing penalties because that advice directly contradicted the text of the form, which states that a taxpayer must file the form by the regular due date of his or her return to receive the automatic extension.

For a discussion of abatement of penalties due to reasonable cause, 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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