Penalties

In 1955, there were a total of 15 taxpayer penalties indicated in the Internal Revenue Code.  By the last update of the IRS Penalty Handbook, in 2014, there were over 150 unique penalties in the IRC that the Service could impose.   Most taxpayers will not encounter more than several of those penalties.  The ones that are the most frequently assessed fall into one of three categories:

·        Failure to File

·        Failure to Pay

·        Failure to Deposit

Most taxpayers are upset about the penalties and ask about getting them removed or at least reduced.  They feel that they are unjust when charged on top of taxes they are unable to pay.  Other than going to Tax Court or District Court (depending upon the type of underlying tax),  there are four methods for getting penalties removed:

1.     Statutory exceptions

2.     Correction of IRS errors

3.     Administrative waivers (such as the First Time Abate)

4.     Reasonable cause

The first three are usually fairly straightforward. They usually apply to only one tax period, and are thus containerized to a specific tax type and return. For example, the FTA applies only to the first tax period of a tax debt case if the taxpayer is eligible for the abatement. Thus, these abatements are usually small.

The fourth category, on the other hand, is where the "significant" penalty abatements most often occur. These penalties often cover more than one tax debt period or year.  If the facts support the reasonable cause standard, this type of abatement can sometimes result in ALL penalties being abated. This is not all that common, but outside of litigating the case, this may be the only option. 

Pursuant to the Internal Revenue Code (IRC), the IRS can assess penalties for failure to file a tax return timely, failure to pay the tax liability when due (normally, the due date for the return, a deposit due date for employment taxes, and other situations), for filing an inaccurate return (accuracy related penalty), of for a fraudulent return (IRC 6663 - intentional underreporting of income or overstating expenses).  There are numerous penalties that Congress defined in the IRC that can be assessed.  This page will discuss the most common types of penalties.

Generally, a penalty that is assessed can be abated (removed) if reasonable cause can be established as the cause of the non-compliance.  Proving reasonable cause can be very challenging.  Therefore, a tax professional should be retained to maximize the probability of relief from penalties.

A NOTE FOR PREPARERS:  If your client is being assessed a penalty based upon YOUR mistake, it may be wise for you to retain another tax professional to represent your client.  This representative can more effectively argue detrimental reliance by your client on your professional services and advice.   If you attempt on your own to get the penalty abated because of your mistake, the IRS may view your efforts as self-serving and not seriously consider the facts and circumstances.  Getting your client relieved of the penalty will generally reduce the potential out-of-pocket cost to you for your mistake (or preclude you from having to file a claim with your professional liability company to reimburse the client). 

 

Managerial Approval of Certain Penalties

This is important to remember.  The Code requires managerial approval to be obtained by an Agent or other IRS employee (like a Tax Compliance Officer) BEFORE communicating with the taxpayer or authorized representative that a penalty is being proposed.  This is generally accomplished by the manager signing the penalty approval form.

Under Code Sec. 6751(a), IRS must provide information about any penalty it imposes under the Code. Specifically, with each notice of a penalty, IRS must include information with respect to the name of the penalty, the Code section under which the penalty is imposed, and a computation of the penalty. Under Code Sec. 6751(b)(1), no penalty can be assessed "unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate".

The issuance of a Revenue Agent Report (Form 4549) and the 30-day letter is often the first indication of the IRS's intention to assert a penalty.  The manager must approve the proposed penalty BEFORE it is proposed to the taxpayer.  In the case of  James Clay and Audrey Osceola, (2019) 152 TC No. 13, the Tax Court concluded that the manager signed the Penalty Approval Form AFTER the RAR and the 30-day letter were issued to the taxpayer.  Typically, filing a Freedom of Information Act request will be the most effective way to get to see a copy of the form and the date of managerial approval.  If approved AFTER the RAR was issued, then the penalty cannot be asserted.

Failure to File Penalty. This is calculated based on the time from the deadline of your tax return (including extensions) to the date you actually filed your tax return. The penalty is 5% for each month the tax return is late, up to a total maximum penalty of 25%. The percentage is of the tax due as shown on the tax return.  NOTE:  If the Failure to Pay penalty is also being assessed, then the Failure to File penalty is reduced to 4.5% for each month the Failure to Pay applies as well.  In other words, the MAXIMUM combined Failure to File and Failure to Pay penalties is 5% per month. 

Failure to Pay Penalty. This is calculated based on the amount of tax you owe. The penalty is 0.5% for each month the tax is not paid in full.  The penalty runs for 48 months maximum (from the due date of the return).

Estimated Tax Penalty.  There is an estimated tax penalty that has to be paid if you underpay your estimated tax. This penalty is in the form of interest on the underpayment for the period the underpayment took place. Each payment incurs different penalties; so you may have to pay tax penalties on an earlier payment even if you had paid enough to cover the underpayment prior to that. In fact, if you don't pay sufficient tax by the due date of each payment period, you may have to pay a penalty even if the IRS has to pay you a refund on your filing your tax return.

Accuracy-Related Penalty – IRC § 6662

In General, IRC § 6662 imposes an accuracy-related penalty on any portion of an underpayment attributable to one or more of the following:

(1) negligence or disregard of the rules or regulations;
(2) any substantial understatement of income tax;
(3) any substantial valuation misstatement under Chapter 1 of the Code;
(4) any substantial overstatement of pension liabilities; and
(5) any substantial estate or gift tax valuation understatement.

The accuracy-related penalty applies only if a return is filed, except that the penalty does not apply in the case of a return prepared by the Secretary under IRC § 6020(b). IRC § 6664(b); see also Treas. Reg. § 1.6662-2(a). The taxpayer also may not be subject to the accuracy-related penalty if the taxpayer had reasonable cause and acted in good faith under IRC § 6664(c). The reasonable cause and good faith exception under IRC § 6664(c) applies to all components of the accuracy-related penalty, with special rules for a substantial understatement attributable to a tax shelter item of a corporation.

The accuracy-related penalty does not apply to any portion of an underpayment on which a penalty is imposed for fraud under IRC § 6663.

Penalty Amount

The amount of the accuracy-related penalty is 20 percent of the portion of the underpayment resulting from the misconduct. The penalty rate is increased to 40 percent in certain circumstances involving gross valuation misstatements.  Stacking of the accuracy-related penalties is not permitted. The maximum amount of the accuracy-related penalty imposed on a portion of an underpayment of tax is 20 percent (or 40 percent in the case of a gross valuation misstatement) of that portion of the underpayment, even if that portion of the underpayment is attributable to more than one type of misconduct proscribed under IRC § 6662. The Service may, and should, however, assert the penalty for the underpayment based on each prohibited behavior, in the alternative, that applies. For example, if a portion of an underpayment is attributable to both negligence and a substantial understatement of income tax, the Service may rely on both theories (asserting the second theory in the alternative) in imposing the penalty, although the maximum accuracy-related penalty that may be imposed is 20 percent of that portion of the underpayment. Treas. Reg. § 1.6662-2(c).

The accuracy-related penalty also does not apply to any portion of an underpayment on which a penalty is imposed for fraud under IRC § 6663.

Interest. This is calculated based on how much tax you owe. Interest rates change every three months. As of January 1, 2008, the IRS interest rate for underpayments of tax is 7% per year.

The IRS has issued a NOTICE that discusses interest and penalties.  You can read that notice here.

Reasonable Cause-IRC 6664

Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations. Essentially, this means something beyond the control of the taxpayer has occurred that has caused the failure to file or not pay taxes timely. It also must be demonstrated that the taxpayer took reasonable steps to "counter" the events and were still unable to pay and or file timely.

Although many of these circumstance evoke great "empathy when heard," sympathy is not going to cause the IRS to abate penalties. The case for abatement must be supported with logical and or legal arguments.  Additionally, each case is weighed on its individual merits not on precedents of other cases.  No precedence can be cited on penalty abatements.

Definition of Reasonable Cause

The IRS gives a long list of events that will be considered for reasonable cause. They are:
 

  • Ignorance of the Law (you must demonstrate you made a reasonable effort to learn the law though)
  •  Error or Mistake was Made, but you must still show "due diligence, ordinary business care and prudence" have been exercised.
  • Forgetfulness, but you must still show "ordinary business care and prudence"
  • Serious Illness, Death, or Unavoidable Absence
  • Unable to Obtain Records
  • Incorrect Advice from a competent tax professional
  • Incorrect advice directly from the IRS, written or oral.
  • Fire, Casualty, Natural Disaster, Other Disturbance
  • Acts of God

The Internal Revenue Manual goes on to say that any reason will be accepted as reasonable cause if it can be shown that the taxpayer exercised ordinary business care and prudence and, despite that, was still not able to comply with their tax obligations.

The following list is taken from the IRM or Internal Revenue Manual that gives the guidelines of what IRS agents are instructed to look at when considering penalty abatement:

  • What are the events that happened, when did it happen, and why did these events prevent you from complying with the tax law?

  • How were your other affairs handled during this time? Did the you (or does it appear) single out the IRS not to be but paid other creditors? What steps were taken to try and mitigate your circumstances? Ordinary business care and prudence is closely looked at here.

  • Is there a direct "timeline" correlation between what happened and the taxes being file late or not paid?

  • Is there a history of filing and or paying late? The IRS is going to look at your  history; repeat offenders will have a tougher job convincing the IRS that this was not intentional.

  • Were the circumstances "beyond the control of the taxpayer" truly unavoidable, and could not be anticipated? If so, this generally establishes reasonable cause.

  • Documentation will be critical to make your case. Provide as much proof of what you are arguing as possible. The greater the amount of "third party" evidence that can be produced,   the better the chances for relief.

How to Request Abatement of a Penalty

There are several ways to request a penalty abatement:

  • A written protest, which is the most common method and goes directly to an appeals          officer generally) who has settlement authority.

  • Verbally in person or over the telephone

  • IRS Form 843 - Usually a Form 843 is filed with a written "brief" or protest

Typically, a protest will comprise of a formally structured letter with an introduction, the request for penalty relief under which relief program(s).

This would be followed by a statement of the facts surrounding the case demonstrating the "reasonable cause" and " ordinary business care" and as much third party documentation of the facts.

Finally, any legal or code related facts that would bolster your claim.

If you submit a Penalty Abatement request and it is denied, you cannot make a request on the same grounds again. Therefore it is very important that you put forth the best case possible when you submit. This is why it is important to have professional representation.

Recent Tax Court Case:

Failure to timely file returns penalties were upheld against married business owners for years they filed well past applicable deadlines: IRS met its burden of production with proof of taxpayers' delayed filings; and fact they suffered some medical problems in subject years wasn't reasonable cause where problems weren't so sever as to keep them from timely filing. (Douglas Bynum, Jr., et ux. v. Commissioner, (2008) TC Memo 2008-14 , 2008 RIA TC Memo ¶2008-14 )

Court says bank error (not employee error) may be reasonable cause to abate employment tax assessment

Don Johnson Motors, Inc. v. U.S., DC TX, 101 AFTR 2d 2008-370, Civil Action No. B-06-047, 12/21/07

A Texas U.S. district court has ruled that employment tax penalties and interest for the 1999-2002 tax years could not be abated due to reasonable cause, even though the taxpayer was unaware that its in-house accountant and its office manager had failed to perform their payroll tax duties. However, there may be reasonable cause to abate an employment tax assessment for the 2003-2004 tax years because of a bank error.

Employee Errors

Facts. From 1999 to 2002, Don Johnson Motors, Inc. (Don Johnson) delegated its payroll tax functions to an in-house accountant, Michael Ezequiel, who performed his role under the supervision of the company's office manager. Ezequiel prepared the company's employment tax returns and was also in charge of monitoring the payroll accounts and the information included on Forms 940 and 941. At some point in 1999, for reasons not explained, Ezequiel stopped paying portions of the company's payroll taxes to the IRS. As a result, Don Johnson Motors made incomplete deposits to the IRS from 1999-2002. The executives of Don Johnson Motors were unaware of this problem until December 2002. Shortly thereafter, the IRS assessed penalties against the company for failure to file employment tax returns and to timely pay taxes.

Law. IRC §6651(a) allows an employer to avoid penalties for noncompliance if it can show that its failure to file, pay, or deposit taxes was due to "reasonable cause" and not willful neglect. Don Johnson Motors requested an abatement of the aforementioned penalties based on IRC §6651(a) .

Ruling. The district court denied the taxpayer's abatement request. In issuing its ruling, it noted that other federal courts have consistently held that the failure of a taxpayer's employee to file or pay taxes does not establish reasonable cause (e.g., see McMahan v. Commissioner, 114 F. 3d 366 (1997), and Conklin Bros. of Santa Rosa, Inc. v. U.S., 986 F. 2d 315 (1993)).

The district court also distinguished the current ruling from In the Matter of American Biomaterials Corporation, 69 AFTR 2d 92–611 (1992). In American Biomaterials, the Third Circuit Federal Court of Appeals ruled that there may be reasonable cause to abate employment tax penalties when corporate officers commit criminal acts (e.g., embezzlement) against the corporation. The district court distinguished the current ruling from that one by pointing out that Don Johnson Motors had never presented any evidence that its in-house accountant and its office manager had engaged in any criminal action. The district court said that the employment tax deficiencies incurred by Don Johnson Motors simply resulted from having “lax internal controls or failing to secure competent external auditors that even the court in American Biomaterials stated was insufficient to establish reasonable cause.”

The district court also rejected the taxpayer's argument that there was reasonable cause to abate the penalties because of the lack of notification from the IRS that the company was falling behind in its tax obligations. The court cited IRC §6151 and said that the IRS was under no obligation to provide taxpayers with notice that they failed to file their returns or pay their taxes.

Bank Error

The IRS also assessed penalties against Don Johnson Motors for untimely employment tax deposits for the 2003 and 2004 tax years. The company was required to pay its taxes electronically using the Electronic Federal Tax Payment System (EFTPS). The company was provided with new software by its bank for EFTPS transactions. The bank sent one individual over to Don Johnson to train the company on the software. The trainer had been employed with the bank for two days. The software required the tax period to be entered in two separate fields or the deposit would not be made by the bank. This fact was not mentioned to company employees. Consequently, the bank did not make any of the taxpayer's employment tax deposits for the period in question.

The IRS assessed penalties against Don Johnson Motors for failing to make its deposits on a timely basis. An IRS revenue officer reviewed this situation and determined that the assessment was proper. Don Johnson Motors appealed the ruling to the district court.

The district court said that there may be reasonable cause to abate the penalties because none of the previous rulings on this matter had considered the bank's concession that it had failed to properly train Don Johnson employees. The court also noted that: (1) Don Johnson had provided the bank with the information necessary to make the company's employment tax deposits in a timely manner, and (2) there were sufficient funds in the company's bank accounts to make the deposits. According to the EFTPS handbook, these two facts provide sufficient evidence to establish reasonable cause. As a result, the court remanded the case back to the IRS for further consideration as to whether the penalties should be abated.
 

Penalties in a Partnership Case

In a 2010 Tax Court case, the TC had to consider the applicability of the penalties to partners because of the partnership's participation in a tax shelter.  Here is the Court's thinking on the matter:

Alpha I, L.P. v. U.S., (Ct Fed Cl 5/27/2010) 105 AFTR 2d ¶2010-930

There are six accuracy-related penalties in Code Sec. 6662 including negligence and substantial understatement of income tax. Accuracy-related penalties are not cumulative. Thus, for example, if a portion of an underpayment of tax required to be shown on a return is attributable both to negligence and a substantial understatement of income tax, the maximum accuracy-related penalty is 20% of such portion. ( Reg. § 1.6662-2(c)). This is sometimes referred to as the anti-stacking rule.

There is an absolute defense to either of these penalties if the taxpayer shows that there was a reasonable cause for such portion of the understatement and the taxpayer acted in good faith with respect to it. ( Code Sec. 6664(c)(1) ). Additionally, the amount of the substantial understatement penalty is reduced for any portion of the understatement as to which the taxpayer can establish substantial authority for the position that the taxpayer took. ( Code Sec. 6662(d)(2)(B)(i) ). If the substantial understatement was the result of a tax shelter, the taxpayer may reduce the amount owed by establishing that substantial authority exists for the position taken and that the taxpayer reasonably believed that the reported treatment of an item was more likely than not the proper treatment. ( Reg. § 1.6662-4(g)(1) .

Facts. In this case, Alpha I, L.P., by and through Robert Sands, a Notice Partner in Alpha I, asked the Court to summarily determine that the various taxpayers (numerous entities and their members) were not subject to either a 20% negligence penalty or a 20% substantial understatement penalty under Code Sec. 6662 for any underpayment of tax resulting from their Code Sec. 465 concession. The government asked the Court to summarily reach the opposite conclusion.

Specifically, the government asserted that the taxpayers engaged in two Son of BOSS tax shelters, and that the 20% substantial understatement penalty and the 20% negligence penalty apply to any understatement of tax.

The taxpayers asserted that the substantial understatement and negligence penalties were inapplicable because they had substantial authority for the position in their initial returns and because they relied in good faith on the advice of tax professionals.

The Court noted that it had jurisdiction under the TEFRA unified audit rules but only with respect to the applicability of penalties and defenses as they relate to the partnership. The Court would not consider any penalties or defenses unique to any of the partners individually. The Court said that the amount of any applicable penalties that are payable by an individual partner must be resolved at the partner level, but the underlying determination that an accuracy-related penalty is proper under Code Sec. 6662 must be made in a partnership level proceeding.

In order to resolve the issue, the Court had to determine whether the taxpayers were engaged in a tax shelter, whether the substantial understatement or negligence penalties were applicable to taxpayers, and whether the taxpayers had substantial authority for the position taken. In order to reach these determinations, the Court had to undertake a close examination of complex facts, decipher myriad statutory provisions, and analyze numerous cases and other authorities interpreting those provisions.

After undertaking a detailed examination of the facts and the law, the Court held that (1) the taxpayers were engaged in a tax shelter, (2) the substantial understatement accuracy-related penalty of Code Sec. 6662(b)(1) and the negligence accuracy-related penalty of Code Sec. 6662(b)(1) apply, and (3) the substantial authority defense, the reasonable basis defense and the reasonable cause and good faith defense were not available to the taxpayers.

Penalty for Early Distribution for a Retirement Fund

If you withdraw money from a pension fund that you have contributed to over the years (usually getting a tax deduction for the amount of your contribution - such as in a traditional IRA account), you generally will treat the distribution as taxable income (ordinary tax rates) - PLUS, pay a penalty of 10% of the amount withdrawn unless you meet an exception to the imposition of the penalty.

Below is a 2010 Tax Court case that pretty well sums up the exceptions to the penalty.  Unfortunately for petitioner in this case, he did not meet any of the exceptions and was hit with the 10% penalty.

Code Section 72—10% additional tax on early retirement plan distributions—deemed distributions—exceptions—separation from service.
 

Code Sec. 72(t) 10% additional tax was upheld against pro se actuary/former New York State Dept. of Ins. employee who received deemed distribution from qualified pension plan as result of his post-employment termination default on plan loans in year in which he was still under age 55: no Code Sec. 72(t) exception applied since distribution was one-time distribution that didn't arise on death or disability, wasn't made under qualified domestic relations order or on account of levy under Code Sec. 6331 , wasn't in respect to call to active duty, didn't represent ESOP distribution, wasn't part of substantially equal periodic payments, and didn't go to medical expenses or qualify as payment after separation from service for individuals age 55 or over. (Kwame Owusu v. Commissioner, (2010) TC Memo 2010-186 , 2010 RIA TC Memo ¶2010-186 )

Penalty (and Interest) Abatements - Amended tax returns

Chief Counsel Advice 201520010

In emailed Chief Counsel Advice (CCA), IRS has concluded that: a) the Code's seeming requirement that only unpaid tax liabilities can be abated is actually merely permissive; and b) the taxpayer's late-filed amended return should be treated as a claim for overpaid penalties and interest.

Code Sec. 6404(a) provides: “IRS is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which—(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed.”

Under Code Sec. 6511 (a), a claim for credit or refund of an overpayment must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later.  In the case at hand, the taxpayer filed an original return with respect to which interest and penalties were calculated. All of the taxes that taxpayer paid with respect to that return were paid on or before the date the return was filed.  The amended return was time-barred , but the IRS agreed that it reflected the correct tax liability. The amended return showed that there was due a refund of tax.  That being the case, the penalties and interest that had been assessed were excessive as they were based on a liability greater than was actually due per the original return.

Taxpayer was in the process of paying off his interest and penalty liability on a monthly basis.

IRS says that the excess interest and penalties can be abated. In this Advice, Counsel noted that, while Code Sec. 6404(a) specifies “unpaid” assessments, IRS's view is that Code Sec. 6404(a) is permissive and that IRS is not prohibited from abating the paid portion of assessments.  IRS says that amended return should be treated as refund claim with respect to interest and penalties. IRS also said that, although the amended return was time-barred as a claim for refund of the excess taxes paid, that return should be treated as a claim for refund for the penalties and interest paid in the two years prior to the date the amended return was filed, to the extent those amounts exceeded what the taxpayer actually owed.

Reasonable Cause Case Decided Against Taxpayer

Intress, (DC TN 8/2/2019) 124 AFTR 2d ¶2019-5118

A married couple’s late filing penalty refund claim was dismissed because the couple’s reliance on a tax professional to e-file an extension to file their 2014 return was not reasonable cause to abate the penalty when the preparer's negligence resulted in the extension not being properly filed.

Here are the background facts for this case.  Taxpayers, Kristen Intress and Patrick Steffen (married and who filed a joint return), employed a professional tax preparer to prepare and file an extension to file their 2014 income tax return. Their tax preparer prepared an electronic Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and queued up the form through her e-file software. However, the preparer failed to hit send and, therefore, the IRS did not receive the couple’s 2014 Form 4868 on or before the due date for the extension, which was April 15, 2015.

The IRS imposed and collected a late filing penalty under Code Sec. 6651(a) from the couple because they failed to file a valid extension for their 2014 tax return and filed that return late.  The couple argued that their reliance on a third-party tax preparer to timely file their extension was reasonable cause under Code Sec. 6651 and that Boyle did not apply to e-filed tax returns because taxpayers have no control over the e-filing process.   The couple also argued that they were entitled to a first-time abatement relief from the late filing penalty under the IRS's First Time Abatement program.

Under Code Sec. 6651(a), the IRS can impose and collect a penalty from an individual who fails to timely file an income tax return. The penalty is 5% of the amount of tax required to be shown on the return if the failure is 1 month or less, with an additional 5% for each additional month, or fraction thereof, during which such failure continues, not exceeding 25% in the aggregate. The IRS will abate the penalty if the taxpayer’s failure to timely file is due to reasonable cause and not due to willful neglect. (Code Sec. 6651(a))

The Supreme Court has held that a taxpayer's reliance on a professional third party for tax filing is not reasonable cause for abatement of late penalties should the third party fail to timely file. Reasonable cause is defined as being "unable to file the return within the prescribed time" notwithstanding the taxpayer's "exercise of ordinary business care and prudence". (Boyle, (S Ct. 1985) 55 AFTR 2d 85-1535) Thus, under Boyle , the taxpayer has the duty to timely file taxes, and reliance on an agent to fulfill that duty is unjustified when the agent does nothing the taxpayer could not do himself.

There is a limited exception to Boyle for taxpayers who are disabled and must rely on an agent to prepare and transmit their returns to the IRS. (Erickson, (Bank DC MN 1994) 74 AFTR 2d 94-6588)

Rev Proc 2011-25, 2011-17 IRB 725, provides that a professional tax preparer is not required to e-file an individual income tax return if the preparer obtains a hand-signed statement from the taxpayer stating that the taxpayer chooses to file a paper return and the taxpayer, not the preparer, files the paper return with the IRS.

A taxpayer may qualify for administrative relief from a late filed return penalty under the IRS's First Time Penalty Abatement program when the taxpayer:

  1. Didn’t previously have to file a return or had no penalties for the 3 tax years prior to the penalty tax year;
  2. Filed all currently required returns or requested an extension of time to file; and
  3. Has paid or arranged to pay any tax due. (Internal Revenue Manual (IRM) at 20.1.1.3.3.2.1)

The IRS argued that the couple’s reliance on a tax professional was not reasonable cause for not timely filing their extension under Boyle .  The district court noted that the couple’s argument that Boyle did not apply to e-filed tax returns was a novel legal question not previously addressed by the federal courts. However, the district court determined that, in this case, Boyle applied.

The district court rejected the couple’s argument that their reliance on a tax professional to file their extension was reasonable cause to abate the late filing penalty. The district court noted that taxpayers are not obligated to use a tax professional to e-file an extension of time to file or a return. In fact, individuals are not required to e-file their own returns.

The obligation to e-file a return arises only if the taxpayer uses a professional tax return preparer who is required by the IRS to e-file returns. However, even then taxpayers can opt out of e-filing using the procedure in Rev Proc 2011-25. Thus, the couple had the option to prepare their own extension and mail it to the IRS because they were not required to use a tax professional to prepare or to e-file their extension. Since the decision to use a tax preparer was within the couple’s control, and there was no evidence that the couple was not capable of preparing Form 4868 due to a disability, Boyle applied to their reasonable cause argument. But, the couple failed to show they exercised ordinary business care and prudence when filing their extension.

The district court also concluded that the "ordinary business care" standard in Boyle would continue to be the standard for reasonable cause, at least until e-filing becomes universally mandatory or paper filing so cumbersome that ordinary taxpayers could not file paper returns. But, the district court noted that the "ordinary business care" reasonable cause standard in Boyle might need to be reassessed given the trend towards universal e-filing and the difficulty that could pose to Boyle's application going forward.

The district court commented that the couple's argument that the burden of timely e-filing should be on the tax professional, not on the taxpayer, would be much more plausible if the IRS required all returns to be e-filed. At that point, the average taxpayer would be similarly situated to a taxpayer with disabilities in that reliance on an agent or intermediary for transmission of the electronic return would be required.

The district court also rejected the couple's argument that they were entitled to a first time penalty relief under the Internal Revenue Manual. As the IRS pointed out, the IRM is a policy guide to a governmental agency and does not entitle a taxpayer to judicial relief. (Laidlaw, TC Memo 2017-167)

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Revised 5/1/2020