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CPA's Serious Illness Did Not Excuse Couple's Failure to File Tax Return on Time

(Parker Tax Publishing March 2020)

A district court held that a couple who hired a CPA to prepare their tax return did not have reasonable cause for failing to timely file their return as a result of the serious illness and hospitalization of the CPA. The court found that, under U.S v. Boyle, 469 U.S. 243 (1985), reliance on an agent does not constitute reasonable cause, and that the couple did not qualify for the limited exception applicable to a corporate taxpayer that is disabled due to its agent's intentional conduct that is beyond the corporation's control or supervision. Willett v. U.S, 2020 PTC 82 (N.D. Cal. 2020).

Donald and Andrea Willett hired CPA Anne Goode to prepare their 2014 federal tax return. They gave their 2014 tax documents to Goode in August 2015. The couple's documents included original K-1s, W-2s, and 1099s. After giving the documents to Goode, the Willetts repeatedly attempted to contact her. In October 2015, Goode finally responded and said she was seriously ill, would prepare the Willetts' tax returns after her release from an extended care home, and would pay any penalties and interest resulting from the late filing of the return.

The Willetts said they relied on Goode's assertions based on their long-standing relationship with her. In November 2015, they visited Goode's home and were again assured that their return would be completed. But after that conversation, they never heard from Goode again, despite multiple attempts to reach her between December 2015 and June 2016. Goode died on February 21, 2017.

The Willetts began calling other CPA firms in December 2015, but none would agree to help them because they were either too busy or the couple's circumstances were too problematic. The Willetts eventually found a CPA in June 2016 and filed their return on September 26, 2016. The same day, the IRS assessed a late filing penalty of $34,712 and a late payment penalty of $6,238. The Willetts paid the penalties in full and filed a refund claim with the IRS. After that claim was denied, they sued for a refund of the penalties in a district court.

The Willetts argued that their reliance on Goode constituted reasonable cause and not willful neglect for their failure to timely file their return under Code Sec. 6651(a)(1). They also suggested that they were "disabled" from filing their return due to Goode's possession of their original documents. For this argument they relied on Conklin Bros. of Santa Rosa, Inc. v. U.S., 986 F.2d 3145 (9th Cir. 1993), a case in which the Ninth Circuit held that a corporate taxpayer's reliance on an agent can establish reasonable cause if the taxpayer shows that it was disabled from timely complying with a filing deadline - e.g., where its agent's conduct was beyond the taxpayer's control or supervision.

The district court rejected the Willetts' arguments and granted the government's motion to dismiss. The court noted that the couple provided a detailed timeline of their contacts with Goode but concluded that this timeline failed to demonstrate ordinary care because it merely illustrated the numerous attempts to contact Goode. The court reasoned that the Willetts made no excuse for the late filing other than reliance on their agent, which the court found was not reasonable cause under U.S v. Boyle, 469 U.S. 243 (S. Ct. 1985). The court explained that in Boyle, the Supreme Court ruled that reliance on one's agent does not establish reasonable cause, and the court rejected the Willetts' argument that the Boyle decision was narrowly tailored to its facts and that reasonable cause has to be decided on a case-by-case basis.

The also court noted that, while it is true that the Ninth Circuit in Conklin held, in the case of a corporate-taxpayer, that reliance on an agent can establish reasonable cause if the taxpayer shows that it was disabled from complying timely, the Ninth Circuit has not extended Conklin to a case involving individuals. The court found it unnecessary to decide whether Conklin's disability exception applied to cases involving individual taxpayers because, even if it did, the Willetts had not adequately alleged that the exception applied. The court found that Goode's actions were not remotely comparable to the level of misconduct in Conklin.

The court also concluded that the Willetts were not entitled to a refund of the late payment penalty. In the court's view, the couple failed to show the extraordinary circumstances for financial hardship necessary to constitute reasonable cause for the late payment.

For a discussion of delinquency penalties, see Parker Tax ¶262,105.

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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