In Estate of Hake v. United States, No. 1:15-CV-1382 (M.D. Pa 2017), the court considered whether relying on an attorney for when a tax return had to be filed, rather than relying on the attorney to file the tax return, was reasonable cause. The case should make it easier to get failure-to-file penalties removed for taxpayers in Delaware, New Jersey, and Pennsylvania and will no doubt be cited by taxpayers in other states as well.
In Hake, the taxpayer hired an attorney. The attorney told the taxpayer that they had obtained an extension of time to file their tax return. The taxpayer then filed their return within the time period specified by the attorney. The attorney was mistaken as to the extended filing deadline, however. The law is clear that the extension was only to pay, not to file. The IRS assessed a failure to file penalty. The attorney admitted his error. The court considered whether taxpayer’s reliance on the attorney’s error was reasonable cause.
There is no bright line rule that defines the term “reasonable cause.” There is no succinct summary that can even defines the contours of what facts may qualify for reasonable cause. Instead, there is only a body of case law that largely says what is not reasonable cause. So one can only rely on court cases that say what is not reasonable cause to establish reasonable cause given different facts.
Most attempts to define reasonable cause are framed in terms of the Supreme Court’s United States v. Boyle, 469 U.S. 241, (1985) decision. Boyle stands for the proposition that a taxpayer cannot establish reasonable cause by simply delegate their filing obligation to an attorney who fails to file on time. As noted in Hake, the Boyle case does not go any further than this.
Categories of Late Tax Return Filing Cases
The court in Hake identified the following three types of late tax return filing cases:
In the first category consists of cases that involve taxpayers who delegate the task of filing a return to an agent, only to have the agent file the return late or not at all. Id. (citing Boyle, 469 U.S. at 249-50). In Boyle, the Supreme Court held that in such cases, reliance upon one’s attorney to file a timely tax return was not reasonable cause to excuse the late filing. Id. The second category of late-filed cases identified in Boyle, as that decision is construed by the court of appeals in Thouron, is where a taxpayer, in reliance on the advice of an accountant or attorney, files a return after the actual due date, but within the time that the taxpayer’s lawyer or accountant advised the taxpayer was available. Id. Finally, in the third category are those cases where “an accountant or attorney advises a taxpayer on a matter of tax law[.]” Id. (quoting Boyle, 469 U.S. at 251) (emphasis in Boyle).
With respect to the second and third type of cases, the court noted that:
…the holding of Boyle does not reach the very circumstances of this case, where the executors did not delegate their filing duty to their lawyer, but where they did rely upon their lawyer to advise them when their taxes needed to be paid and their return filed….
in Boyle the Supreme Court expressly declined to address the question of whether a taxpayer demonstrates “reasonable cause” when, in reliance upon the advice of counsel, the taxpayer files a return “after the actual due date but within the time the adviser erroneously told him was available.”
The court also noted the split in authroity for this issue:
In reaching this result, we recognize that some other courts have interpreted Boyle in the manner urged by the United States, and on facts that are substantially similar to those presented in this case. See, e.g., Knappe v. United States, 713 F.3d 1164 (9th Cir. 2013); West v. Koskinen, 141 F.Supp.3d 498 (E.D. Va. 2015).
The Ninth Circuit includes California, Arizona, Nevada, Oregon, Washington, Montana, and Idaho.