Court Rejects the ‘Taking All Necessary Steps’ Defense to Penalties

If you take all of the steps to prepare and remit a tax return to the IRS except for placing it in the mail, is this sufficient to avoid a failure to timely file penalty?  There is case law suggesting that it may be in some circumstances.  The U.S. Tax Court recently addressed this in Plato v. Commissioner, T.C. Memo. 2018-7 concluding that the prior law is no longer valid.  It is not clear whether this prior law is invalid, however.

Facts and Procedural History

The facts in Plato are as follows:

On April 15, 2008, [the taxpayer] left the joint return and a check for $46,073 “under the mat at the front door” of his wife’s residence for her to sign and mail to the IRS. There is no evidence in the record that the return was mailed or the check negotiated. [The taxpayer] did not request an extension of time to file the joint return, but he asked his wife to request an extension. Neither the request for an extension of time nor the joint return was filed with the IRS.

The procedural history is as follows:

The IRS prepared a substitute for return (SFR) for 2007. … [T]he IRS issued petitioner a notice of deficiency, determining a deficiency and additions to tax for 2007. [The addition to tax included a failure to timely file penalty]. During the course of the examination and after the notice of deficiency dated May 5, 2014, petitioner submitted a 2007 Form 1040 reporting a filing status of married filing separately (separate return) and tendered a payment of $43,490 with the separate return. Respondent accepted the payment made with the separate return on March 16, 2015….

The issue for the court was whether there was reasonable cause for the late filing that would justify not imposing the failure to file penalty given these facts.

The Failure to File Penalty

The failure to file penalty is set out in Sec. 6651(a)(1).  The penalty applies to a taxpayer who fails to timely file a return.  The penalty may be excused if the failure is due to reasonable cause and not due to willful neglect.  There have been a number of court cases that address reasonable cause.  The United States v. Boyle, 469 U.S. 241, 245 (1985) case is the leading court case on point.  Boyle stands for the proposition that a taxpayer cannot delegate their tax return filing obligation to another.  It does not address a situation where the taxpayer takes some but not all steps necessary to file a tax return.

Taking Steps Necessary to File a Tax Return

The taxpayer in Plato cited Willis v. Commissioner, 736 F.2d 134 (4th Cir. 1984)–which is a case that pre-dated Boyle.  Willis involves a businessman who handed his tax return to his secretary and told her to file it and to move funds over to pay the taxes.  The secretary did not mail the return timely, which resulted in an failure to file penalty.  The Fourth Circuit Court concluded that the taxpayer in Willis established reasonable cause for excusing the penalty as he “did all possible to see that the return was timely filed with [the] IRS.”

Did the U.S. Tax Court Err in Rejecting Willis?

The U.S. Tax Court did not accept the taxpayer’s reliance on Willis.  The court cited two reasons for this.

First, the U.S. Tax Court in Plato noted that Boyle overturned Willis.  It is not clear that Boyle overturned Willis.  Taking all necessary steps necessary to file the return is not necessarily the same as delegating a filing requirement to another person.

The “cause” in Boyle was a clerical oversight by the tax return preparer.  The taxpayer in Boyle was handsoff.  The taxpayer did not physically see a tax return that was completed prior to the due date or take steps to draw funds to pay the tax or instruct the tax preparer to take the completed return and payment and mail them.  The taxpayer in Willis did all of these things.

The taxpayer in Willis took all steps to see that the return was timely filed–which was why the court in that case reached the conclusion it reached; the taxpayer in Boyle did not–which is why the court in that case reached the decision it reached.

Boyle and Willis are easily distinguishable.

Second, the U.S. Tax Court in Plato also concluded that the taxpayer cannot rely on Willis because he:

left the joint return and a check for $46,073 under the doormat of his wife’s residence. [The taxpayer] did not request an extension of time to file the joint return, but he asked his wife to request an extension of time to file. Indeed, [the taxpayer] took no further action to comply with his requirement to file a tax return until [the IRS] issued him a notice of deficiency.

These facts seem very similar to Willis.

Moreover, requesting an extension of time to file wouldn’t seem to have any bearing on the issue.  The same can be said for not taking steps to file a late return–particularly if he was not aware that the original return was not timely filed.

Is the Concept in Willis Still Good Law?

The Plato case leaves one wondering whether the all necessary steps concept in Willis is still good law.  The IRS still does abate penalties occasionally at the administrative level based on this concept.

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