Tax Prep Software Troubles and Incompetent Employees Don't Negate Penalties

(Parker Tax Publishing November 2020)

The Federal Claims Court held that a company did not have reasonable cause for failing to file its employment tax returns on time where it delegated tax preparation duties to an employee, as the result of a serious injury that incapacitated the company's owner, and that employee failed to meet the employment tax return deadlines. The court also rejected the company's argument that difficulties in using its tax preparation software were to blame. All Stacked Up v. U.S., 2020 PTC 340 (Fed. Cl. 2020).

Background

All Stacked Up is a C corporation that provides masonry services. Beginning in 2013, All Stacked Up filed tax returns quarterly using a Form 941. The company experienced significant trouble complying with its quarterly filing obligations in 2013. Its first quarter returns and its second quarter returns were filed late. Its fourth quarter returns, due January 31, 2014, were not filed until July 13, 2015. Likewise, payments and deposits were routinely late. This resulted in the IRS charging penalties and interest. All Stacked Up's noncompliance continued throughout 2014 and 2015. The company failed to file any of its 2014 quarterly returns until July 13, 2015. In 2015, only the third quarter return was timely filed.

All Stacked Up also failed to deposit, underpaid, and/or paid its taxes late in each of the four quarters in 2014 and 2015. This, again, compelled the IRS to assess penalties and interest for the respective violations. On October 31, 2017, All Stacked Up sought relief from the IRS for penalties assessed from the tax period ending the fourth quarter of 2013 through the fourth quarter of 2015 - a total of nine consecutive quarters. All Stacked Up filed Form 843, Claim for Refund and Request for Abatement, for each of these nine quarters, referring the IRS to an attachment that detailed the basis for refund or abatement. The attachment stated that the owner of All Stacked Up was seriously injured in March of 2013, requiring the owner to hire an employee to prepare taxes for the business. According to All Stacked Up, the employee failed to keep the business compliant with its tax depositing, filing, and payment obligations, and the company consequently terminated the employee. All Stacked Up also highlighted issues with its tax preparation software, QuickBooks, but was "unsure" whether the malfunction was user error or the program itself. Nevertheless, All Stacked Up asserted that the owner's injury and the subsequent failures of the delegated tax preparer-employee constituted reasonable cause such that All Stacked Up should be relieved of the penalties and interest it was assessed and refunded the sums paid toward these charges.

The IRS responded to each of the nine Form 843 requests, disallowing each claim. All Stacked Up appealed each of the disallowance notices, asserting its failure to comply with its tax obligations was due to "reasonable cause" as outlined in the Internal Revenue Manual and requesting relief from the assessed penalties.

Upon completion of the review, the IRS Office of Appeals notified All Stacked Up and recommended abatement of 16.66 percent of All Stacked Up's failure to file, failure to pay and failure to deposit penalties for tax periods December 31, 2013, through tax period June 30, 2014. As a result, the IRS abated a total of $3,197 in penalties and sustained the remainder of the penalties. The IRS also declined to waive accrued interest and notified All Stacked Up that penalties and interest would continue to accrue until the outstanding balance was paid in full. All Stacked Up filed a claim for refund with the Court of Federal Claims, alleging that it had reasonable cause for failing to comply with its tax obligations, and that its failures were not due to willful neglect.

All Stacked Up alleged reasonable cause existed to excuse its failure to fulfill its obligations under the Code because the owner acted as a reasonably prudent business person in delegating tax preparation duties to an employee following the owner's injury. All Stacked Up further asserted that it worked in good faith to be in compliance with the federal tax laws, and that tax preparation errors were attributable to difficulties using the QuickBooks computer software.

The government argued that the duty to file returns, duty to deposit, and duty to pay taxes are all nondelegable duties, and All Stacked Up's asserted excuses on behalf of its employee cannot demonstrate reasonable cause.

Analysis

Citing the Supreme Court's decision in Boyle v. U.S., 469 U.S. 241 (S. Ct. 1985), the Court of Federal Claims noted that, while reasonable cause is undefined in the Code, it is, together with Reg. Sec. 301.6651-1(c)(1), interpreted to make absence of fault a prerequisite to avoiding the failure-to-file and failure-to-deposit penalties. Essentially, the court noted, the failures to file, deposit, or pay must have been beyond the taxpayer's control in order to avoid penalty. To make out a claim for refund of penalties due to reasonable cause, the taxpayer must plead it was unable to file its returns and pay taxes due to no fault of its own. The taxpayer's claim must not be based on mere negligence, nor forgivable mistake. Additionally, the court said, it is well-established that a taxpayer's duties to comply with the Code are nondelegable as a matter of law.

Applying Boyle to the instant case, the court said it was clear as a matter of law that retention of an employee or software to prepare and remit tax filings, make required deposits, and tender payments cannot, in itself, constitute reasonable cause for All Stacked Up's failure to satisfy those tax obligations. According to the court, the employee's failures are All Stacked Up's failures, no matter how prudent the delegation of those duties may have been. Consequently, the delegation of tax preparation duties as a matter of business operations bore no relation to whether reasonable cause existed to excuse All Stacked Up's failures to file, deposit, and pay taxes as a matter of law. Having established that the failures of its agents were binding on All Stacked Up, the court then turned to whether user error regarding the employee's use of QuickBooks software can constitute reasonable cause. Quite simply, the court said, it cannot.

Citing Boyle again, the court noted that it requires no special training or effort to ascertain a deadline and make sure that it is met. Utilizing tax preparation software does not alleviate the taxpayer's duty to be aware of, and comply with, the deadlines set forth in the Code. Failure to meet deadlines due to an agent's inability to operate tax preparation software, i.e. carelessness, is not consistent with "ordinary business care and prudence" under Reg. Sec. 301.6651-1(c)(1), and thus cannot form the basis of a claim of reasonable cause.

For a discussion of who is responsible for ensuring the timely filing of employment tax returns, see Parker Tax ¶210,105.

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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