One of the foundational principles in tax procedure is that reliance on an accountant or lawyer to file a tax return cannot in and of itself constitute reasonable cause to avoid a late-filing penalty. The Supreme Court said as much in the 1985 case United States v Boyle. Over the last few years taxpayers and practitioners have started to challenge Boyle in the e-filing context. 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.
Sometimes the preparer may fail to receive a rejection notice from the IRS; sometimes the preparer gets the reject notice and fails to tell the client. In either situation, the client then gets a surprise letter from the IRS months or maybe years later, leading to late filing penalties.
In the case of the Hayneses, the taxpayers heard from their accountant/preparer that on the last day for filing their 2010 tax return he had in fact e-filed the return. But for some reason the Social Security Number erroneously appeared on the line designated for an employment-identification number, and the IRS rejected the return. The preparer did not get a reject notice and neither he nor his clients took any steps to confirm that the IRS processed the supposedly e-filed return. After eventually receiving IRS correspondence the taxpayers filed their return and paid a late filing penalty. They sought a refund for the penalty, first with the IRS and then after the IRS denied the claim in federal district court. The district court granted the government summary judgment, concluding that as a matter of law under Boyle the taxpayers could not rely on their accountant to satisfy a return filing obligation even if the return filing process in the 21st century differs in kind from what was done back in the Reagan years.
In last month’s brief opinion, the Fifth Circuit took a different approach to the dispute. While noting that the application of Boyle in the 21stcentury world of e-filing is an “interesting” issue, it remanded the case back to the district court. It did so because it believed that there was a factual dispute that the lower court needed to resolve before it could even get to the legal issue:
Whether it was reasonable for Dunbar [the accountant] to assume, based on the IRS’s silence, that it had accepted the Hayneses’ return or whether ordinary business care and prudence would demand that he personally contact the IRS to ensure acceptance is a genuine question of material fact for the jury to decide. Because Dunbar is the Hayneses’ agent, if a jury determines that his actions meet the reasonable-cause standard, it must find the same to be true for the Hayneses—barring any determination of independent negligence by them. After all, principals are not only bound by their agents’ failures, as in Boyle, but also by their diligence.
If, as a matter of fact, it was reasonable for the accountant to assume that the IRS accepted the return without seeking confirmation, then the penalty does not stand. If, however, the jury finds it was not reasonable, then the 21st century Boyle issue is teed up:
It is this question of material fact that makes it unnecessary for us to decide whether a broad e-filing exception to Boyle exists. That complex question need only be answered if Dunbar, in fact, acted negligently in filing the Hayneses’ tax return. Only then would the Hayneses be relegated to relying solely on their reliance on Dunbar to meet the reasonable-cause standard, thereby teeing up the Boyle question.
Conclusion
We will closely follow this case, as well as the handful of other cases that are percolating in the courts that raise the issue.
For prior PT coverage on this issue, see our post on the lower court opinion in the Haynes case and our post discussing a similar issue in the Spottiswood case. Those posts generated thoughtful comments and also link to some other useful sources.
About Leslie Book
Just what constitutes “filing” in an electronic filing?
The language of IRC 7502(c)(2) and its cognate Treas. Reg. 301.7502-1(d) speak in terms of transmitting the electronic filing. From my way of thinking, the IRS cannot “reject” an electronically-filed return until the transmission is received into the IRS’s computer system (and don’t get me started on the IRS’s computer systems). Just the curbstone opinion of a baby-boomer who grew up in the household of an electronics engineer, and whose childhood playmates included sons and daughters of the ENIAC and UNIVAC computer pioneers who were in Dear Old Dad’s professional and social circles.
Continuing with the paper filing analogy, what if a paper document is mailed to the IRS, but the GS-½ in the mailroom (or non-governmental employee if the mailroom has been A-76’ed) rejects the mailpiece and returns it to the sender? [Don’t tell me that such a thing does not occur; it happened to me not too long ago, albeit with a document other than a tax return.].
A paper document is “filed” when delivered to the IRS, regardless of how timely it actually lands on the desk of the cognizant bureaucrat [Hull v. United States, 146 F.3d 235, 239 – 240 (4th Cir. 1998).]. If the IRS computer system’s receipt function is an “electronic mailroom” and the “electronic mailroom” rejects an electronically-filed return, then how does that differ from our aforementioned GS-½ bouncing back a document to the sender?
‘Continuing with the paper filing analogy, what if a paper document is mailed to the IRS, but the GS-½ in the mailroom (or non-governmental employee if the mailroom has been A-76’ed) rejects the mailpiece and returns it to the sender?’
The same question applies when some IRS transcripts show that the original return was filed but months later was no longer on file. The question is compounded when some IRS transcripts don’t show the filing and subsequent unfiling of the original return. As far as I can see, this is worse than Schroedinger’s cat because the return is not only both filed and unfiled until the box is opened, but it remains both filed and unfiled after the box is opened.
Courts usually have some answers though. If the government benefits from the return having been filed, then the return was filed, for this case. If the plaintiff benefits from the return having been filed, then the return wasn’t filed, for this case. If the court can’t figure out which decision to make, but the government benefits from dismissal for lack of jurisdiction, then the court dismisses for lack of jurisdiction.
The question is easier for court filings. If the court neither files a document nor returns it unfiled, then it wasn’t filed. If a US domestic certified mail return receipt is returned to the server with the signature of a court employee, but the witness’s notarized affidavit embarrasses the government, then the court rules that the court did not receive the witness’s notarized affidavit.
‘A paper document is “filed” when delivered to the IRS, regardless of how timely it actually lands on the desk of the cognizant bureaucrat [Hull v. United States, 146 F.3d 235, 239 – 240 (4th Cir. 1998).].’
What if it doesn’t land on the desk of a cognizant bureaucrat?
“What if it doesn’t land on the desk of a cognizant bureaucrat?”
Back in my day, the problem was (and still is) not only that the IRS’s left hand did not know what the right hand was doing, but that the left pinky did not know what the left thumb was doing. One factor in this state of affairs is that there was (and still seems to be) a taboo within the IRS culture against asking another functional office about what they are doing. [This was a cultural shock to me when I onboarded at the IRS from the Department of Defense, where, in the procurement and supply function, EVERYBODY asks you what you are doing.].
I had cases where, as the “cognizant” bureaucrat, there were documents that still did not reach me after I was on record as having been handed the case folder. In one such case, the tax return was postmarked on Thursday, due date the next Monday (actually, Sunday, but rolled out to Monday per IRC 7503), stamped as received on Tuesday. When I got to the audit almost a year later, the taxpayer’s representative informed me that the IRS collections people were attempting to impose 6-figure lateness penalty.
Fortunately, the taxpayer rep had mailed the tax return (Form 706 Estate Tax Return) via Certified Mail, and produced the original return receipt “green card” (not THAT kind of “green card”) showing actual delivery to IRS Service Center on Friday, the day after the postmarking.
Of course, I abated the penalty (after resolving the other audit issues, of which there were several).
Norman, the short answer to your question is that if the “cognizant bureaucrat” does not get the paper, it then falls upon the taxpayer (or taxpayer rep) to demonstrate to the CB that the paper was in fact filed.
I can’t always prove that it was filed. I can only prove that it was mailed, and sometimes that it was received. Here are two bad examples.
A non-party in the US served a brief by certified mail on the US Attorney, US Department of Justice, Attorney-General, and IRS. Reply cards came from the first three. As usual but not always, the reply card from the IRS did not return, but the server obtained proof from USPS. Next the server sent US District Court for the Central District of California the original and two conformed copies of the brief, stamped self-addressed envelope (US domestic mail), and certificate of service including copies of the reply cards and USPS reports. As recommended by the Pro Se Clinic, the server served the court by USPS domestic certified mail with reply card. The reply card returned with the signature of a court employee. One conformed copy and stamped self-addressed envelope DID NOT return. Later the court ruled that the court had not received the brief. The court destroyed the original of a witness’s notarized declaration along with the rest of the brief and copies. So even when there is proof of delivery on a court, the court overrides the proof.
In a case not yet in court, my wife sent registered mail with reply card to the IRS. The reply card came back uncompleted, demonstrating non-delivery. However, the web sites of both USPS and Japan Post asserted it was delivered. A few days later, the web site of USPS asserted the mail was no longer delivered. My wife submitted a request for investigation of registered mail. USPS told Japan Post that the letter disappeared, not delivered and not returned to sender. Japan Post compensated my wife. Stupid me, I asked USPS’s Office of the Inspector General what happened, so USPS deleted both the record of delivery and the record of non-delivery from their database. I still have printouts but didn’t guess that USPS would delete their records.
I also have a few other cases of asserted non-delivery and lots of cases of delays. Long ago, some countries uses to add their own postmarks to incoming registered mail, so there would be a postmark showing what date the mail was first handled by USPS. Now there are only printouts from USPS’s web site, and I’ve never seen a court accept one of those as proof of a date.
Sometimes the most important facts are found in the footnotes:
“Additionally, though the Hayneses’ return reflected an unpaid balance due in the amount of more than $40,000, they made no tax payment in October 2011, or at any time, by electronic withdrawal or otherwise, prior to August 2012. The Government argues that this nonpayment information was sufficient to impose a duty of inquiry on the Hayneses, relative to the status of their return, such that reasonable cause is necessarily legally absent. ”
For the record, when the courts refer to an EIN as an “employment identification number,” what they mean is “employer identification number.”
Thanks for the clarification/correction on the EIN. I think the lack of payment pre Aug 2012 (similar to facts in the Spottiswood case I discussed last year when the taxpayer did not check to see if there was electronic payment) is where the taxpayer runs into problems
The rich are different, as F. Scott Fitzgerald noted. They don’t have to balance their checkbooks when a discrepancy of only $40,000 might be noticed. But Lacerte is the Rolls Royce of professional tax software, and a friend who can afford it tells me, “Lacerte has tools within the program to verify that a return has not been acknowledged, without having to call them.”
The case history does not address why these taxpayers did not qualify for “First Time Abatement” relief. Maybe they didn’t ask, or maybe it was not the first time they had filed late.
According to the taxpayers’ brief: “Subsequently, in the latter part of 2012, the IRS notified the Plaintiffs that their return had not been accepted. The same return was immediately refiled as a paper return and accepted by the IRS.” The opinion and briefs in Haynes seem to indicate that the the taxpayers were notified in August 2012 via overdue return notice but did not paper file the return until December 2012. Do you think the IRS would have taken a different approach had the taxpayers paper-filed the return within 10 days of being informed that their return was rejected?
Per IRS website: “In order to timely file the return, the taxpayer must file the paper return by the later of the due date of the return or ten calendar days after the date the IRS gives notification that it rejected the electronic portion of the return or that the return cannot be accepted for processing.”
‘Do you think the IRS would have taken a different approach had the taxpayers paper-filed the return within 10 days of being informed that their return was rejected?
Per IRS website: “In order to timely file the return, the taxpayer must file the paper return by the later of the due date of the return or ten calendar days after the date the IRS gives notification that it rejected the electronic portion of the return or that the return cannot be accepted for processing.”’
Those are two different deadlines. The taxpayer might be able to paper-submit (without knowing if it will be filed) within 10 days of being informed. But the date of being informed is likely to be more than 30 days after the IRS says it gave notification. The IRS sends letters including 10-day notices by methods reasonably calculated to take longer than 10 days, such as sea mail from Estonia to Japan, with undated postal meters.
The next question is, supposing the taxpayer gets lucky and paper-submits within 10 days, can the taxpayer rely on the IRS’s statement posted on the IRS’s web site? The IRS, DOJ, and courts seem pretty unanimous in answering No to this question.
“From my way of thinking, the IRS cannot “reject” an electronically-filed return until the transmission is received into the IRS’s computer system (and don’t get me started on the IRS’s computer systems). ”
Your way of thinking should be commended, because it is absolutely and completely logical.
The Spottiswood case was previously discussed on this blog. There, I made these comments:
What the IRS rejected, was a return that it received. And if the IRS received it, it was filed. And if they say they didn’t receive it, then how could they reject it?