Court Revisits Reasonable Cause Abating Penalties

The U.S. Supreme Court has made it clear that taxpayers cannot avoid penalties by blindly rely on tax attorneys to file tax returns and make tax payments. These situations are unfortunate. The court in Specht v. United States, No. 15-3095 (6th Cir. 2016) highlights one way that taxpayers may be able to avoid the bright line rule set out in the U.S. Supreme Court’s precedent.

United States v. Boyle

In the leading case on penalties and reasonable cause for abating penalties, the Court in United States v. Boyle, 469 U.S. 241, 245 (1985), concluded that taxpayers cannot avoid late filing and payment penalties if their returns or payments are late due to some fault of the tax attorney. The idea is that allowing taxpayers to avoid penalties by relying on a tax attorney to file or pay their taxes would lead to non-compliance by other taxpayers and that avoiding this risk is more important than the unjust results for individual taxpayers whose tax attorneys fail to file tax returns or remit payments timely.

Specht v. United States

This was addressed in Specht. In Specht, the taxpayer was the personal representative of an estate. She hired an attorney who had over fifty years of experience with estate planning to prepare and file the estate tax return and to pay the estate taxes. The personal representative did not know that the attorney was suffering from brain cancer or that the attorney’s competency was deteriorating. Moreover, the attorney made several specific representations to the personal representative that the tax return was filed and the taxes paid, even though the return was not filed and the taxes were not paid.

In asking that the penalties be abated, the taxpayer in Specht attempted to distinguish the facts from Boyle by noting that the taxpayer in Boyle was sophisticated; whereas, the taxpayer in Specht was not. The court agreed that the taxpayer was less sophisticated in the Specht case, but the court did not find the distinction to be relevant.

Brown v. United States

As noted in Boyle, the bright line rule in Boyle does not apply where there are circumstances that prevent the taxpayer, not the taxpayer’s advisor, from being able to take steps to file the tax return or pay the taxes. According to the court in Specht, this is consistent with the case in Brown v. United States, 630 F.Supp. 57 (M.D. Tenn. 1985). Brown is a case that taxpayers often cite when asking the IRS to abate penalties.

In Brown, the personal representative was seventy-eight years old and had a high school education and minimal experience in tax matters. The attorney who was to prepare and file the tax return was hospitalized two weeks before the filing deadline, which resulted in the tax return being filed late. The court in Brown concluded that the personal representative’s age and health prevented the personal representative from engaging another attorney. The court concluded that this was sufficient reasonable cause for abating the penalties.

The Take Away

So the Specht case serves as a reminder that taxpayers should identify reasons why the taxpayer, not their tax attorney, was unable to see to it that the tax return was filed or taxes paid. These facts should be clearly documented and presented when asking that the IRS abate failure to file or failure to pay penalties.