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Another Instance Where Relying on a Tax Expert Does Not Excuse Penalties Imposed On A Taxpayer

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Although it seems reasonable for a taxpayer to assume that by soliciting the advice or services of a tax expert the taxpayer would be insulated from any tax penalties stemming from a mistake made by the tax expert, unfortunately, case law does not always support that assumption.  Specifically, the Ninth Circuit recently ruled that a taxpayer was liable for a penalty for filing a late estate tax return even though the taxpayer relied on a certified public accountant (CPA), who incorrectly advised him about the extended filing deadline.  See Knappe v. United States, 713 F.3d 1164 (9th Cir. 2013).

In Knappe, the taxpayer was named as the executor of an estate.  Because the taxpayer had no prior experience serving as an executor or filing an estate tax return, the taxpayer enlisted the help of a CPA.  The CPA correctly informed the taxpayer that the deadline for filing the estate tax return was nine months after the decedent’s date of death.  In need of additional time to prepare the return, the taxpayer sought advice from the CPA about requesting an extension of the filing deadline from the IRS.  The CPA mistakenly told the taxpayer that he could obtain a 12-month extension of both the filing and payment deadlines.  Acting on the erroneous advice, the taxpayer filed the estate tax return several months late and the IRS assessed a 20% late filing penalty, amounting to $196,414.60.

The taxpayer argued that his reliance on the CPA constituted “ordinary business care and prudence” such that the taxpayer had an apt defense to the penalty—the failure was due to reasonable cause and not due to willful neglect.  The Ninth Circuit, however, disagreed.

The Ninth Circuit addressed the familiar Supreme Court case, Boyle, which involved a taxpayer who delegated the task of filing a tax return to an expert, only to have the expert file the return late.  Boyle v. United States, 469 U.S. 241 (1985).  In contrast to Boyle, the taxpayer here did not delegate the task of filing the return to an expert.  Rather, the taxpayer personally filed the return after the actual deadline, but within the time that the CPA erroneously told him was available.  In fact, the Supreme Court in Boyle expressly declined to address the precise question posed in Knappe.

In Boyle, the Supreme Court drew a sharp distinction between substantive tax advice, on which taxpayers may reasonably rely, and non-substantive tax advice, on which taxpayers may not rely.  The Supreme Court explained that determining the filing date for a tax return is a non-substantive matter.  Although determining the date for a filing extension is different from simply determining a filing deadline, the Ninth Circuit found that it was not different enough.  That is, similar to the question of the determining the filing deadline of a tax return, the question of when the estate tax return was due once an extension had been obtained is also a non-substantive question.  Accordingly, the Ninth Circuit concluded that the taxpayer did not exercise ordinary business care and prudence when he relied on the CPA’s advice regarding the extended deadline.

Interestingly, the Ninth Circuit cited another tax case that treated the question of whether multiple filing extensions were available to the taxpayer as a substantive question, thus, absolving the taxpayer of tax penalties.  It seems there’s a very fine line separating substantive tax advice from non-substantive tax advice.