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

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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 BoylePadda 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.

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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.

About Leslie Book

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

Comments

  1. Kristina Leitz says

    As a tax preparer myself, I never go to the due dates and am sending multiple reminders with consequences if not filed on time.

  2. charles e falk says

    Ironically, if a paper return had been filed, the IRS would have accepted it as timely filed and then notified the taxpayer of the discrepancy.

    • Norman Diamond says

      No, if the IRS temporarily accepts a paper return as timely filed, but the IRS later unfiles the return and deletes records of the original return, then the IRS does not accept the return as filed. Tax Court designates the return as proffered but not filed.

  3. Kenneth H. Ryesky says

    Section 2001 of the Internal Revenue Service Restructuring and Reform Act of 1998 (Pub. L. 105-206) mandates electronic filing mode as a preferred national policy. Specifically, § 2001(a)(2) set a goal that at least 80% of all Federal tax and information returns be filed electronically by 2007 (which would seem to be for tax year 2006). IRC § 6011(f) authorizes the Secretary of the Treasury (which, in Codespeak, effectively means the IRS) to promote and incentivize electronic filing.

    The IRS in fact continues to heavily and proactively promote filing in the electronic mode. In 2002, even before the familiar April 15th filing date, the IRS played the Electronic Filing card in dealing with the WuFlu epidemic and its effects upon the IRS’s operation:

    “Alert

    Due to staffing issues, processing paper tax returns could take several weeks longer. Taxpayers and tax professionals are encouraged to file electronically.”

    https://web.archive.org/web/20200327042637/https://www.irs.gov/filing/individuals/how-to-file

    The technological environment has indeed changed significantly from the days of Boyle. Many taxpayers are so postured as to reasonably depend upon intermediaries to perform the act of filing if the filing is done in the preferred electronic mode.

    It is, then, quite appropriate that the 2020 Taxpayer Advocate’s Purple Book includes a recommendation that Boyle be legislatively tweaked to include appropriate dependence upon such an intermediary as “reasonable cause” under IRC § 6651.

    https://taxpayeradvocate.irs.gov/Media/Default/Documents/2019-ARC/ARC19_PurpleBook_04_ReformPenInts_4.pdf

  4. From the quoted opinion: ” It transmitted the electronic version to the IRS on October 16, 2013, at 12 a.m.”

    I seriously doubt that happened. E-filed returns are transmitted to a third-party software vendor that then makes sure the 1’s and 0’s meet IRS standards to be accepted as a digital return. The data are then forwarded to IRS. At least one of these data aggregators is headquartered offshore. That doesn’t seem to bother many people, perhaps because it is not in Venezuela.

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