The failure to file a timely return or make timely tax payments will trigger penalties under the Internal Revenue Code, but there is a defense: the penalty will not apply if the taxpayer can show “that such failure is due to reasonable cause and not due to willful neglect.” I.R.C. § 6651(a)(1), (2). The relevant regulations indicate that reasonable cause exists if the taxpayer exercises ordinary business care and prudence. Proc. & Admin. Regs. § 301.6651-1(c).
Common sense would then suggest that a taxpayer who does not file a return because his lawyer or his accountant told him that he didn’t need to would have a defense to the penalty for failure to file. Unfortunately, common sense isn’t all that common, particularly in the world of tax. Thus, there are a number of bad decisions out there holding that professional advice is not enough. For example, the Ninth Circuit held last year that reliance on an accountant’s advice is not sufficient to support a defense unless the issue is ambiguous. Knappe v. United States, 713 F.3d 1164, 1172-73 (9th Cir. 2013). As I have indicated previously, I believe this approach is unfair to taxpayers and ignores how they interact with their tax advisers.
Consequently, it was refreshing to see a favorable decision for a taxpayer who relied on advice that payment of tax was not due at the time an estate tax return was filed. Estate of Thouron v. United States, 2014 U.S. App. LEXIS 8890 (3d Cir. May 13, 2014).
The Court’s opinion held that reliance on professional advice can support a finding of reasonable cause, distinguishing cases in which a taxpayer relies upon an agent to timely file a return, which is simply a ministerial act. Id., slip op. at *9-*12.
This is a favorable outcome for taxpayers, who are rarely in a position to critique the advice they get from their accountants and attorneys.
Jim Malone is a tax attorney in Philadelphia; he focuses his practice on federal, state and local tax controversies. © 2014, MALONE LLC.