Reasonable Cause: When can you rely on a tax professional to avoid penalties ?

By Sanford Millar of MillarLaw A Professional Corporation On Sunday, October 2, 2016

When can a taxpayer rely on the advice of a tax professional is fundamental to establishing “reasonable cause” for failure to timely file tax returns.  The U.S. Supreme Court stated the standard for what constitutes reasonable reliance on a tax professional and what is a non-delegable duty in United States v. Boyle.

In Boyle the taxpayer was the Executor of an estate.  The Executor hired skilled counsel, but he lawyer blew the statute on the due date for the estate tax return.  The taxpayer was assessed a late filing penalty and interest.  The taxpayer claimed that he reasonably relied on a professional to timely file the estate tax return.  The court found that the executor had a non-delegable duty to file the return.  The court said in it opinon:

“Engaging an attorney to assist in the probate proceedings is plainly an exercise of the “ordinary business care and prudence” prescribed by the regulations, 26 CFR § 301.6651-1(c)(1) (1984), but that does not provide an answer to the question we face here. To say that it was “reasonable” for the executor to assume that the attorney would comply with the statute may resolve the matter as between them, but not with respect to the executor’s obligations under the statute. Congress has charged the executor with an unambiguous, precisely defined duty to file the return within nine months; extensions are granted fairly routinely. That the attorney, as the executor’s agent, was expected to attend to the matter does not relieve the principal of his duty to comply with the statute.

This case is not one in which a taxpayer has relied on the erroneous advice of counsel concerning a question of law. Courts have frequently held that “reasonable cause” is established when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken.”

What the opinion of the court means is that a taxpayer can rely on an attorney to determine if a return is required, such as in the case of Information Returns like  Form 5471 Return of a Ccntrolled Foeign Corporation, of Form 3520 Report of Foreign Gift, Bequest or Inheritance, and by extension to a Report of Foreign Bank Accounts, “FBAR, but once it is determined that a return is required, the onbligation to timely file is non-delegable.

As the failure to file penalties can be very substantial, even though no tax may due it is wise for taxpayers to engage counsel long before the due date to determine if a return is due

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