Now that Tax return filing season has just past, a recent US Court of Appeals for the Fifth Circuit decision, Haynes v. United States, No. 17-50816 (5th Cir. Jan. 29, 2019), indicates that many of those taxpayers will face uncertainty if their returns are late due to preparer errors or technological issues when electronically filed (e-filed).
Internal Revenue Code Section 6651(a)(1) excuses a taxpayer from penalties for failure to file a return on time if they show the failure was “due to reasonable cause and not due to willful neglect.”
How Boyle applies to e-filing original tax returns remains an open question; as Boyle was decided in 1985 when e-filing did not exist. In late February, the taxpayer in Haynes filed a petition for rehearing with the Fifth Circuit, specifically focusing on the application of Boyle.
However, during the week of March 4, 2019, the government notified the court that the IRS had refunded the late-filing penalty at issue, effectively mooting the case.
This Open Question For Now.
As reflected in the Boyle case, it is still the IRS's position that Boyle controls e-filing and failure of the taxpayer to request and obtain confirmation of e-filing, is negligence on behalf of the taxpayer, which voids the reasonable basis argument. Really?
A court tackling this issue in today’s e-commerce environment may likely come up with different reasoning on how “reasonable cause” should apply when an original return is e-filed. The Electronic Tax Administration Advisory Committee found 79.9 percent of major return types were filed electronically in 2017.
Over the last few years, the Internal Revenue Service (IRS) has required e-filing for an ever-increasing number of returns. Currently, all “specified return preparers” must e-file. This definition includes anyone who accepts compensation to prepare returns and expects to file more than 10 returns per year.
Taxpayers who use “specified return preparers,” i.e., almost any paid return preparer, must rely on the preparers to e-file their returns. Even those taxpayers who use over-the-counter software to file their own returns rely on intermediaries to transmit the return to the IRS. Taxpayers may face risks even if these intermediaries operate properly. To process returns, the IRS relies on some of the oldest computer systems in the federal government and this risk/reliance was illustrated in the 2018 system crash on the last day of filing season.
The Current State Of The Law Has Not Kept Pace With Our Digital Economy.
The Ever-Increasing Reliance On E-Filing Presents Numerous Questions That Are Not Adequately Addressed
In Cases Like Boyle.
At the center of this quandary is whether a taxpayer can have reasonable cause where he relies upon a third party to perform a ministerial act, like e-filing an original tax return. A negative response will thwart the efficiencies gained by technology. A positive response will usher in a whole host of proof issues surrounding how to show that the taxpayer reasonably relied on the third-party agent.
"In several cases, taxpayers argued they had reasonable cause for failure to file their tax returns due to alleged malfunctions in their tax return electronic filing software. The courts uniformly rejected this defense.45
In Spottiswood v. United States, married taxpayers attempted to file their joint income tax return electronically using TurboTax software.46 The IRS rejected taxpayers’ return because the social security number and last name of a dependent on the return did not match the IRS’s records.47 TurboTax informed the taxpayers of the electronic filing rejection on or about the same day that they filed the return. However, the taxpayers did not check the email account associated with their TurboTax account, nor did they use the "check e-file status" TurboTax screen to confirm the IRS had accepted their return until many months later.48 As a result, the court held that the taxpayers failed to establish reasonable cause for failing to file a return.49
Circumstances suggesting reasonable cause are typically outside the taxpayer’s control.50 In Haynes v. United States, taxpayers argued that the failure of the tax software to notify them when the IRS rejected their return was a circumstance beyond their control.51 The court rejected this argument, holding that "an alleged software failure does not rise to the level of the Supreme Court’s definition of a circumstance beyond Plaintiffs’ control—disability, infirmity, objective incapacity—in Boyle."52
Furthermore, the court noted that taxpayers had the option of filing their tax return on paper, electronically, or through any number of tax return preparers.53 The court was careful in distinguishing cases in which reasonable cause may exist when taxpayers rely on erroneous advice of counsel on a question of law.54
Accordingly, while it may have been reasonable for the taxpayers to retain an expert accountant to electronically file their return, their decision to do so does not rise to reasonable cause for the abatement of late-filing penalties.
This case had generated much interest in the tax practitioner community.55 On appeal, the Fifth Circuit vacated the judgment and remanded the case back to the district court, holding that it was not yet necessary to consider whether an exception to the Boyle standard should be created for taxpayers who e-file.56”
45 See, e.g., Spottiswood v. U.S., 121 A.F.T.R.2d (RIA) 1595 (N.D. Cal. 2018), appeal docketed, No. 18-16103 (9th Cir. June 14, 2018); Haynes v. U.S., 119 A.F.T.R.2d (RIA) 2202 (W.D. Tex. 2017), vacated and remanded, No. 17-50816 (5th Cir. Jan. 29, 2019).
46 Spottiswood v. U.S., 121 A.F.T.R.2d (RIA) 1595 (N.D. Cal. 2018), appeal docketed, No. 18-16103 (9th Cir. June 14, 2018).
50 McMahan v. Comm’r, 114 F.3d 366, 369 (2d Cir. 1997) (citation omitted), aff’g T.C. Memo. 1995–547.
51 Haynes v. U.S., 119 A.F.T.R.2d (RIA) 2202 (W.D. Tex. 2017), vacated and remanded, No. 17-50816 (5th Cir. Jan. 29, 2019).
52 Haynes v. U.S., 119 A.F.T.R.2d (RIA) 2202, 2017 U.S. Dist. LEXIS 106252, at *27-28 (W.D. Tex. 2017) (citing U.S. v. Boyle, 469 U.S. 241, 250 (1985)), vacated and remanded, No. 17-50816 (5th Cir. Jan, 29, 2019).
53 Haynes v. U.S., 119 A.F.T.R.2d (RIA) 2202 (W.D. Tex. 2017), vacated and remanded, No. 17-50816 (5th Cir. Jan. 29, 2019).
54 Id. 55 See http://procedurallytaxing.com/delinquency-penalties-boyle-in-the-age-of-e-filing/ (last visited Sept. 4, 2018). The American College of Tax Counsel has filed an amicus brief in support of the taxpayers.
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56 Haynes v. U.S., vacated and remanded, No. 17-50816 (5th Cir. Jan. 29, 2019).