Tax Season is here…How well do you really know your return preparer?

 Posted on February 27,2024 in Preparing Taxes

Some of you might be considering hiring a tax professional, or maybe you already have an accountant you’ve worked with for many years.  Either way, it is easy to assume that once you hire a return preparer and send her all our financial documents, you can fully cross out “FILE TAX RETURNS” off your to-do list. After all, that is the point of hiring a professional to do your taxes, right? 

Well, yes…and no.

The IRS has consistently maintained the position that taxpayers have a “nondelegable duty” to file tax returns.  Court decisions in recent years have uniformly confirmed this position, that it is the taxpayer’s responsibility to ensure the tax returns are filed on time.  In other words, if your preparer fails to timely file your return, even if for reasons completely attributable to the preparer, you will still be liable for any attendant penalties.

There are two primary civil penalties taxpayers can be liable for in these circumstances: failure-to-pay and failure-to-file. The failure-to-pay penalty applies if a taxpayer does not pay his or her  taxes on time; it is calculated based on a (monthly accruing) percentage of the taxes not paid. The failure-to-file penalty applies if a taxpayer did not file the tax return by the due date, and it is also calculated based on a (monthly accruing) percentage of the net taxes not paid by the due date.  

An important case discussing this issue was decided by the Supreme Court of the United States in United States v. Boyle in 1985. The case resolved a conflict surrounding whether a taxpayer’s reliance on an attorney to file his tax return was sufficient to excuse the taxpayer from a late-filing penalty. Here, the executor of an estate delegated the tax return filing to an attorney, who assured the executor that the return would be filed on time. However, due to a clerical error, the return was not timely filed. The Supreme Court ruled that “reliance on an agent” did not amount to “reasonable cause” for failure to file a timely tax return, and accordingly upheld the late-filing penalties against the taxpayer.

Although the Boyle decision dealt with mailed-in returns, it is likely the result will be the same for electronically filed tax returns. From 2011, the Department of Treasury has required tax return preparers who reasonably expect to prepare 11 or more returns in one calendar year to e-file all tax returns. Therefore, it is essentially mandated that your tax professional will file electronically.

In a more recent case called Lee v. United States, a federal court in the 11th Circuit held that the Boyle decision provides a bright line rule that a preparer’s failure to e-file on behalf of taxpayers is no defense to missing a tax return filing or payment deadline. In this case, a surgeon hired a CPA to file tax returns for three years. Each year, the taxpayer’s returns claimed approximately $1 million in gross income and reflected six-figure overpayments. And each year, the taxpayer applied the overpayments to the following year’s estimated tax liabilities. The taxpayer reviewed the returns and signed IRS Form 8879, authorizing his CPA to e-file the returns on his behalf. Unfortunately, his CPA never did, and the taxpayer only learned of this omission much later, in 2018. Although the taxpayer remedied the mistake and filed returns for all three missed years as soon as he could, there was substantial underpayment leading to a payment of $289,000, which included $70,000 of failure to pay and failure to file penalties.

The taxpayer appealed these penalties, but ultimately the court held that Form 8879 does not relieve taxpayers of “exercising ordinary business care and prudence” when filing a tax return or paying taxes. In other words, taxpayers still have a duty to supervise their CPA’s tax preparation and ensure that their tax return had been timely submitted.

The same principle applies to other IRS deadlines, such as the failure to file IRS Form 4868, which is an application for an extension. In another case, Oosterwijk v. United States, the taxpayer’s tax professional failed to file the extension on time. The court here also determined that taxpayers have an “unambiguous” independent duty to make sure their taxes get filed on time. The fact that the Oosterwijks hired another professional to perform the filing did not forgive the taxpayer’s failure to file. The fact that the form was supposed to be e-filed did not change the court’s ruling. Additionally, at the time, there was no way the taxpayers could have confirmed that an extension request had been filed on their behalf. Nonetheless, the Court said that they could always have sent a paper extension request in anyway.

So, are there any remedies for the taxpayer?

Aside from a difficult malpractice suit filed directly against the preparer, relief may possibly be obtained under the “reasonable cause” provisions, if the non or late filing is based on a substantive error made by the preparer, accounting for the delinquency.  Penalty abatement, as it is called, warrants a thorough analysis of the law and applicable facts – contact us if this is something you want to explore.