Doctrine of Substantial Compliance

Taxpayers often ask the government and the courts to overlook failure to comply with legal technicalities by making doctrine of substantial compliance arguments.

The doctrine of substantial compliance is a legal theory that essentially says that one party should not forfeit his or her rights if he or she attempts to comply with the law, but he or she does not fully comply with all of the technicalities of the law.

The doctrine of substantial compliance has been invoked in by individuals in a great number of legal matters, from bankruptcy cases (the bankruptcy code has a specific provision for this) to employee benefits and real estate construction defect cases.

The doctrine of substantial compliance comes into play with tax matters where taxpayers argue that they met a tax filing requirement by providing all pertinent information with their tax returns. In other words, taxpayers use the doctrine to overcome deficiencies in their filed tax forms.

The IRS usually rejects these types of arguments. For example, the IRS recently rejected a taxpayer’s request to pay its estate tax in installments due to the taxpayer failing to timely file the tax election form based on the doctrine of substantial compliance. The IRS decision noted that “the provisions leave no room for a reasonable cause exception for an untimely return.”

Given the number of these types of court cases (many of which do not actually use the term “doctrine of substantial compliance”), perhaps it is time for Congress to add a provision in the tax code that addresses the doctrine of substantial compliance.