Reliance on attorney didn’t excuse estate’s late filing

Relying on an attorney’s or an accountant’s advice may not win over the IRS if you fail to pay your taxes in a timely manner. It all depends on “reasonable cause.”

The family of June West was reminded of this painful fact in a recent U.S. Tax Court case.

June West died on Dec. 27, 2009. She had three surviving children who were to share in the proceeds of her estate.

Shortly after her death, her son Lesley West contacted family attorney John Rodgers for assistance in settling his mom’s estate.

A short time later, John West, another son, sent an email to Rodgers asking him what legal follow-ups were needed in the short term.

In Rodgers’s response to the email the next day, he stated that the estate would need to pay June West’s final bills and possibly file an estate tax return, the final 1040 return and a trust return. He said that these duties could take as little as a few months to as long as two years.

John West responded to Rodgers the next day stating that he was sure estate tax would be due and that he assumed the accountant, John Renner, would take care of preparing the estate taxes.

On Feb. 1, 2010, the West brothers and Rodgers had a meeting to discuss issues regarding the estate. At this meeting, the West brothers did not ask about the filing or payment deadline for the estate taxes. Rodgers did not bring up the topic.

Around November 2010, John West emailed Rodgers to ask him what they needed to do in order to start work on the estate taxes. At the time of this email, the deadline for filing and paying the estate taxes had already passed.

Rodgers began preparing the estate tax return in December 2010. He was not concerned that the deadlines had passed because he had assumed that John Renner, the accountant, had obtained the proper extensions of time.

In March 2011, the estate tax return was filed. A short time later, the IRS sent out a notice that the estate owed $335,637 in penalties and interest.

Rodgers sent a couple of letters to the IRS in an attempt to have the penalties and interest waived, but to no avail. The matter ended up in U.S. District Court, Alexandria (Va.) Division.

An IRS Code section deals with failure to file a timely tax return and pay tax due. Reasonable cause is a defense against late payment and filing penalties. “Reasonable cause” is defined as exercising ordinary business care and prudence but still being unable to file and/or pay the tax within the prescribed time without suffering an undue hardship.

A leading U.S. Supreme Court case on the reasonable cause issue has held that there is no reasonable cause when a taxpayer relies on a professional for the ministerial task of filing a timely return on the taxpayer’s behalf. Timely filing is a non-delegable duty.

This court case leaves open the possibility that there may be reasonable cause when a taxpayer files a late return or tenders a late payment but files or pays within the time frame that an expert, such as legal counsel, has advised.

That was exactly the purported issue in this case.

The District Court ruled in favor of the IRS because, under the facts and circumstances of this case, no expert advice as to a filing or payment deadline was actually provided (Lesley A. West, et al. v. Commissioner, U.S. District Court, E.D. Virginia, 2015-2 U.S.T.C., Oct. 19, 2015).