Rossman v. United States, No. 1:11-cv-00139 (Ct. Fed. Cl. February 13, 2012)
Many practitioners will agree that the IRS is generally lenient in allowing the abatement of penalties for reasonable cause. Reliance on a tax expert or IRS advice, irregularities in mail delivery, and death or serious illness are commonly deemed to be reasonable cause for a failure to file or pay taxes on time. Frequent Enrolled Agent jobs involve helping taxpayers obtain IRS penalty relief due to reasonable cause. As Giovanni Rossman found out, however, a series of extension requests may vitiate reasonable cause even when there is emotional distress, financial difficulty, and misinformation provided by
a tax advisor. Giovanni’s mother died in August of 2005, and Giovanni was named executor of the estate. Prior to the due date of the estate tax return, an extension request was filed and granted, making the estate taxes due and payable on November 15, 2006. When the return was filed, Giovanni requested a second extension to pay the tax liability of over $800,000 so that she could secure loans with real estate and liquidate assets sufficient to pay the tax. An extension was granted until February 15, 2007. On February 14, 2007, she sought and was granted yet another extension to August 15, 2007. At no time did she make a request of the IRS for an installment payment agreement or seek advice about payment options, which are known by any tax professionals with EA training. By the last deadline, Giovanni had paid only $100,000 and the IRS began to assess penalties for failure to pay the balance. It was not until July of 2009 that Giovanni was able to pay the full amount due. By then, that amount included penalties of over $50,000. She then sought an abatement of the penalties on the basis of reasonable cause. Specifically, she argued that reasonable cause for the late payment existed due to: (1) the death of both of her parents in close proximity in time, making it emotionally difficult for her to handle the tax consequences of settling the estate, including obtaining financing and liquidating assets; (2) the existence of an “unprecedented credit crisis” that impeded the estate's ability to pay the estate tax; and (3) her accountant’s failure to give proper advice about the option of satisfying the estate tax liability through monthly payments. The Court of Federal Claims rejected Giovanni’s arguments, but not because the reasons cited did not constitute reasonable cause per se. Rather, it was because the estate sought and received extensions on three separate occasions. That fact, according to the court, indicates that neither the emotional distress of her situation nor the unfavorable market conditions initially prevented plaintiff from complying with the timing requirements. “With Giovanni’s already having demonstrated through her past actions the ability to meet the required standard of ‘ordinary business care and prudence’. . . we are unable to conclude that those same, already known circumstances
(whether personal or economic) can later excuse the estate's failure to meet the extended payment deadline.”
Background
Any penalty imposed under the Internal Revenue Code can be abated by the IRS for reasonable cause. Reasonable cause is not comprehensively defined in the Code but has been generally held to mean that, despite the taxpayer’s responsible conduct, either there exist significant mitigating factors or events beyond his or her control caused the failure. Grounds similar to the ones offered by Giovanna have succeeded in other cases. For example, the Internal Revenue Manual itself recognizes that death or serious illness, or a death or serious illness in the taxpayer’s immediate family may constitute reasonable cause for failure to file a return on time or failure to deposit or pay a tax when due. Conversely, an Enrolled Agent study course cautions that emotional distresses related to things such as a divorce and custody battle, childcare responsibilities, and criminal charges have been rejected as reasonable cause. In many of these cases, as in Giovanni’s, the taxpayer’s ability to manage other obligations has defeated the use of illness or emotional distress as a basis for reasonable cause. A repeated pattern of failing to meet deadlines is also detrimental to a claim for reasonable cause. For example, an attorney who failed to file her tax returns on time argued that turmoil in her life as a result of her obligations as a sole practitioner and the illness (Alzheimer's disease and Parkinsonism) and death of her mother constituted reasonable cause. The court pointed out that she was able to conduct her law practice and a horse-breeding activity in spite of her personal difficulties. Further weakening her case was the fact that the failure was not isolated; her pattern of late filing was lengthy and consistent. On the other hand, reasonable cause was found to exist when the taxpayer's children were seriously ill with pneumonia and his wife was incapacitated with an emergency appendectomy. In another case, caring for a sick child and invalid parent, as well as job-related separation from her spouse causing marital discord was deemed sufficient reasonable cause. An evaluation is necessary of the factors in each situation. Just because an EA knows about penalty abatement from Enrolled Agent education doesn’t mean it is the right course of action to pursue for every taxpayer. Some courts have accepted financial difficulty as reasonable cause, and others have indicated that ignorance of the law or mere oversight may suffice. Each case is viewed on its own merits, and the particular facts and circumstances present can result in different degrees of success for taxpayers that appear to be similarly situated. While reliance on tax professionals is often a basis for reasonable cause, executors of estates are subject to a higher standard of vigilance with respect to filing and payment deadlines. In United States v. Boyle, 469 U.S. 241 (1985), an executor retained an attorney to prepare and file an estate tax return. Although the executor periodically contacted the attorney to monitor the attorney’s progress and was assured that he would be notified when the return was due, the return was ultimately filed three months late as a result of the attorney's error. The executor contended that a late filing penalty was unjustified because reliance on the attorney constituted reasonable cause. The Supreme Court rejected this argument, stating “it requires no special training or effort on the executor’s part to ascertain a deadline and ensure that it is met.” The court founded its conclusion on the notion that Congress has “charged the executor with an unambiguous, precisely defined duty to file the return within nine months” and has “placed the burden of prompt filing on the executor, not on some agent or employee of the executor.” Hence, estate executors relying upon professional assistance are still
responsible for assuring that tax practitioners meet deadlines. Finding a CPA specializing in tax matters or conducting an Enrolled Agent search are superior options.
Question:
Which statement below is correct with respect to abatement of penalties for reasonable cause?
- Reliance on tax professionals by the executor of an estate will always constitute reasonable cause
- Reasonable cause is determined on a case-by-case basis based on the facts and circumstances
- The IRS cannot abate penalties for reasonable cause
- Continuing to meet non-tax obligations will not be considered a factor in reasonable cause determinations
Answer: b
IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
Source: http://fastforwardacademy.blogspot.com/2012/09/reasonable-cause.html
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