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Padda v Comm’r: Possible Opening in Defending Against Late Filing Penalty When Preparer Fails to E-file Timely

Posted on Nov. 25, 2020

Courts have generally not excused taxpayers from late filing penalties when the taxpayer defense is that that the return preparer was responsible for the delinquency.  Decades ago the Supreme Court in Boyle held that reliance on a third party to file a return does not establish reasonable cause because “[i]t requires no special training or effort to ascertain a deadline and make sure that it is met.”  We have previously discussed how Boyle seems incongruent with e-filing. As I noted last year in Update on Haynes v US: Fifth Circuit Remands and Punts on Whether Boyle Applies in E-Filing Cases “the basic question is whether courts should reconsider the bright line Boyle rule when a taxpayer provides her tax information to her preparer and the preparer purports to e-file the return, but for some reason the IRS rejects the return and the taxpayer arguably has little reason to suspect that the return was not actually filed.”

So far taxpayers have not been successful in arguing that courts should distinguish Boyle. Padda v Commissioner is the latest case applying Boyle in these circumstances. Like other cases where the taxpayer’s late filing was due to a preparer’s mistake the court did not relieve the taxpayer from penalties. What is unusual though is that in rejecting the defense Padda implicitly acknowledges that differing circumstances might lead to a taxpayer win.

I will summarize the facts and discuss the slight opening the opinion suggests.

The opinion nicely summarizes what went wrong:

Padda and Kane’s 2012 federal individual income tax return was due October 15, 2013. On October 15, 2013, Padda and Kane signed IRS Form 8879, “IRS e-file Signature Authorization” to authorize Ehrenreich’s accounting firm to electronically file their 2012 Form 1040, “U.S. Individual Income Tax Return”. On October 15, 2013, Ehrenreich’s accounting firm was electronically filing several tax returns just before midnight. Ehrenreich’s accounting firm created an electronic version of Padda and Kane’s return on October 15, 2013, at 11:59 p.m. It transmitted the electronic version to the IRS on October 16, 2013, at 12 a.m. On October 16, 2013, the IRS rejected the return as a duplicate submission. Ehrenreich’s accounting firm electronically resent the return on October 25, 2013, and it was received and accepted by the IRS the same day.

Prior to trial, the IRS and spouses Padda and Kane stipulated that the return was filed on October 25, 2013. The IRS had proposed late filing penalties under Section 6651, which trigger a 5% penalty of the amount required to be shown on the return if the failure to file is under a month, as the case here. In arguing that they had exercised reasonable care and prudence, the taxpayers explained that “1) Ehrenreich’s accounting firm pressed a button only a few seconds late, (2) they relied on Ehrenreich’s accounting firm to timely file the return, and
(3) they themselves could not have pressed the button to timely file the return.”

In rejecting the defense, the Padda opinion cites to Boyle and other cases which provide that taxpayers cannot delegate their filing obligation other than in circumstances where the advice pertains to whether a return needs to be filed at all.

What I find interesting is that the opinion could have just cited Boyle and stopped there. Instead, it suggested that a relationship with a preparer who had history with the taxpayer of submitting e-filed returns on time might have led to a different outcome:

Even if sometimes it might be reasonable for a taxpayer to rely on his or her accountant to timely file his or her returns (contrary to the caselaw), it was not reasonable in this particular case for Padda and Kane to rely on Ehrenreich’s firm to timely file their return. Padda and Kane have relied on Ehrenreich’s firm to file their returns every year since at least 2006. And every year since then, except for 2011, their return was filed late. Yet they have continued to use Ehrenreich’s firm to file their return year after year. Padda and Kane’s failure to ensure that Ehrenreich’s firm timely filed their 2012 return demonstrates a lack of ordinary business care, particularly in the light of the firm’s history of delinquent filings.

Given the the firm’s delinquent filing history, the opinion concluded that the taxpayers failed to establish that they had reasonable cause for the late filing.

Conclusion

We wait for perhaps better facts for a court to distinguish Boyle. The Boyle-blanket rule seems out of place in today’s world where there may be little way to monitor preparers who taxpayers should be able to expect can meet a deadline. Padda suggests, though does not explicitly embrace, that some reliance may be reasonable, but when there is a long past history of delinquency, even if the taxpayer was not in a position to monitor the particular filing, it will be difficult to find that the taxpayer has a winning reasonable cause defense.

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