“I Thought I Was Getting a Refund” is An Inadequate Excuse for Late Filing

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Parekh v Commissioner  raises what I suspect to be a fairly common situation: a taxpayer believes that he is due a refund, and because of that belief may not file a tax return on time or even request an extension. Because the penalty for failing to file a timely tax return depends on the presence of a tax liability, if the taxpayer believes he is due a refund he may not feel the need to file by the April 15 deadline. (Of course, there still is a need to file a return, which serves both as an original return and as a refund claim, lest you blow the SOL on refunds, but that is another story and perhaps another blog post).

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Sometimes, as in Parekh, the taxpayer is off on the calculations, and in fact does owe taxes. Parekh tees up the issue as to whether a taxpayer can have reasonable cause for not timely filing if the reason for the late (in this case 15-months late) filing is due to the taxpayer believing that it did not really matter because he thought he was getting money back from Uncle Sam.

Here are the facts, somewhat abbreviated. Parekh and his wife filed their 2012 return about 15 months late, and did not request an extension. IRS audited the return, and proposed an approximate $8,000 deficiency due to alternative minimum tax, which the original return did not calculate, as well as a $1,666 late filing penalty under 6651(a)(1). The Parekhs conceded the tax but disputed the penalty. Appeals had found no reasonable cause for the late filing, noting also that the taxpayers had a prior history of late filing and for good measure were late on subsequent returns (important as this likely  took them out of qualifying for the first time abatement, an issue Stephen has discussed before).

The taxpayer’s argument centered on his belief that there were no consequences for late filing a return that reflected a refund:

I figured, reasonably so I thought, that since I’d be getting a refund it was OK to file late * * * . In fact, I had considered the de facto deadline for filing to be three years if one is getting a refund since after that the refund is forfeited. As I take a quick look at some tax advice websites this is pretty much what they say. For example: “if they owe you a refund, the IRS really doesn’t care when you file. In fact, you have three years to file and still get your money.”

In 2012, however, they had an AMT liability due to a job switch and the unusual occurrence of distributions from retirement accounts associated with his former employer.   At trial, and as the opinion notes only after retaining an attorney, the husband also claimed that the late filing was due to frequent travel both to Oklahoma for his new job and on numerous trips to India to care for a sick parent.

This did not amount to reasonable cause. In getting to that conclusion, the opinion notes that at trial the husband agreed that the return was not complicated, and could have been prepared “in a day or two.”

The opinion lists some (not exhaustive) examples where a taxpayer was able to demonstrate that the delinquency was due to reasonable cause and not willful neglect:

  • unavoidable postal delays,
  • the timely filing of a return with the wrong IRS office,
  • the death or serious illness of a taxpayer or a member of his immediate family,
  • a taxpayer’s unavoidable absence from the United States, or
  • reliance on erroneous advice from a competent tax adviser or IRS officer.

The combination of past returns generating a refund and  some unexpected domestic and international travel due to job changes and family illness, especially when the current year was not complex, does not amount to reasonable cause:

Even if we were to credit petitioner husband’s testimony about his heavy travel schedule, it is inconceivable that he could not have found two days in which to fulfill petitioners’ filing obligation, as opposed to filing that return 15 months late. His response at trial–that “he didn’t think his tax return was something he had to do that very minute”–suggests that he did not take petitioners’ timely filing obligation seriously. (emphasis added). If petitioners truly intended to satisfy that obligation but were incommoded by problems suddenly arising in spring 2013 they could have requested an automatic six-month extension of time to file, as they eventually did for their 2014 taxable year. See sec. 6081. Their failure to request such an extension suggests, once again, that the real reason they filed late was their belief that the filing deadline did not matter because they were expecting a refund.

The moral of the story is that while sometimes it may not matter for penalty purposes if a taxpayer files late, the taxpayer should be sure that the return is going to generate a refund. In addition, the late filing of a return that has a liability raises the possibility that the taxes could not be discharged in bankruptcy, an issue Keith has flagged.Doing the math (or more likely plugging in the information on the software) before the fact can save a chunk of change and in some circuits preserve the potential for discharge.

 

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Raymond Cohen says:

    IRM 20.1.1.3.6.1. While item #1 specifically list certain Code Sections that specifically apply to the First Time Penalty Waived, item #9 below specifically states the following:

    “Penalty relief under FTA does not apply to the following:
    Returns with an event-based filing requirement, generally returns filed once or infrequently such as Form 706, U.S. Estate Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
    The daily delinquency penalty (DDP), see e.g., IRC 6652(c)(2)(A).
    Form 1120, U.S. Corporation Income Tax Return/Form 1120-S, U.S. Income Tax Return for an S Corporation if, in the prior 3 years, at least 1 Form 1120-S, was filed late but not penalized.
    Information reporting that is dependent on another filing, such as various forms that are attached.
    Note: This list is not all inclusive.”

    I filed a FOIA and was told that no list exists. What implication does this IRM have to FTA

    • Probably no impact. This is the list. I gather IRS reserves the right to add more to a discretionary program. It will be interesting to see how (or if) a court considers IRS FTA determinations as subject to court review, in perhaps a CDP proceeding.

  2. Is it just me or are there an astounding number of court cases to which you just ask yourself, “why in the world did they file this petition”?

  3. Norman Diamond says:

    “(Of course, there still is a need to file a return, which serves both as an original return and as a refund claim, lest you blow the SOL on refunds, but that is another story and perhaps another blog post).”

    Whether or not another blog post appears, Google searches will find this one, so I wish to help subsequent searches.

    There used to be a Form 2688 additional extension for people who don’t have enough information to file a correct return when the normal Form 4868 extension period expires. Form 2688’s instructions used to recommend filing a preliminary return together with the form in case the IRS rejects the additional extension. The IRS never rejected mine, but the IRS used its usual slow methods of mailing so an approval containing a new deadline arrived after the deadline already passed. So I gave up and told them to use the preliminary return, which they did, and around a year later they sent my refund.

    Form 2688 doesn’t exist any more. You have to file a protective return before the extension period expires, or sometimes before the statute of limitations expires. Even when the return is preliminary and contains estimates, you are not allowed to write “preliminary estimated” on this kind of return. You have to write “PROTECTIVE” at the top of the return. Inside the return, where you know you’re estimating numbers because you don’t have the true and correct numbers, you are not allowed to write “estimated”. You have to write the numbers and pretend they’re correct. You have to sign the preprinted jurat at the bottom of Form 1040 without alteration, pretending that you know and believe the attached forms and schedules to be true and correct even when you do not believe them. If you tell the truth instead, the IRS and courts will both penalize you and confiscate your refund.

    For example, I still don’t know the correct amount of Canadian income tax to report on my US Forms 1116 for year 1985. If I delayed filing my US return until learning the correct numbers, I’d have more problems. I used to think I was doing the right thing by telling the truth, and oddly the IRS accepted my returns for 1985 and around thirty other years, didn’t complain, didn’t penalize me, and paid my refunds. I only learned the hard way in a few particular years, when payers issued Forms 1099, the IRS and courts penalized and confiscated refunds for years when payers issued Forms 1099, and eventually TIGTA reported that an IRS data entry clerk was jailed for embezzling withholdings from Forms 1099. What a big coincidence, that. But nonetheless, the IRS and US Department of Justice proved in court that my illegal honesty deserved to be punished. DO NOT write that an estimate is an estimate. DO sign the jurat without alteration. Only write the word “PROTECTIVE” at the top of Form 1040.

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