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Is Age A Defense to Failure to File Returns?

By admin of MillarLaw A Professional Corporation On Sunday, July 24, 2016

Two  recent cases illustrate why age alone is no defense to failure to file returns criminal and civil penalties.  The first case is a Tax Court Case in which the the taxpayer was assessed late iflingand late payment penalties.  The taxpyaer argued that his age and coplexity of the tax code were the reasons he did not file and pay timely.  The court responded:

“The additions to tax under section 6651(a)(1) and (2) apply once the
Commissioner has met his burden of production unless the failure to comply was due to reasonable cause and not due to willful neglect. The taxpayer bears the burden of establishing reasonable cause. Higbee v. Commissioner. Petitioner argues that the complexity of the tax law coupled with his advanced age caused him to be unable to comply with timely filing and payment requirements but that he filed as expediently as he could. Petitioner gave no other explanation of why his tax return was late. Petitioner testified that he had no documents showing when the return was mailed. Most of his arguments were related to the estimated tax addition to tax, which is not before the Court. Petitioner contended that he had overpaid his tax for previous years. Petitioner did not establish that he had reasonable cause for failing to timely file his return and pay the tax due …”

The Tax Court in Davis restated the rule that the taxpayer bers the burden of showing his/her conduct was rasonable. Absent admissible evidence, such as a lack of mental competency, reasonable reliance on professional advice, proof of timely mailing by production of a Certified Return Receipt, or similar proof, the penalties for failure to timely file and failure to timely pay are proper.

The second case is U.S. v. Tuka, a  criminal case where a conviction was upheld for tax evasion and willful failure to file returns.  The elements of tax evasion are staed as:

In order to sustain Tuka’s convictions for tax evasion under 26 U.S.C.
§ 7201, the government was required to prove three elements with respect to each of the tax years in question: “1) the existence of a tax deficiency, 2) an affirmative act constituting an attempt to evade or defeat payment of the tax, and 3) willfulness.” United States v. Farnsworth… . Similarly, to convict Tuka for
willful failure to file a tax return under 26 U.S.C. § 7203, the government had to prove, for each of the tax years in question, that: (1) Tuka was required to file a tax return, (2) he failed to do so, and (3) his failure was willful. McKee, 506 F.3d at 244.

The key element is “iwlfullness”.  If a taxpayer is suffering from a mental disease or defect that adversely affect his/her judgment as established by medical evidence then the taxpayer may not have acted willfully.  These defenses are sometimes difficult to prove.  Assume a taxpayer has Alzheimer’s disease.  The issue is did the disease affect the taxpayer’s state of mind when the return was due not when the audit  occurred.

When significant penalty exposure exists for failure to file returns, including Information Returns like a Report of Foreign Gift or Inheritance where the penalty is 25% -35% of the gift or inheritance or failure to report a foreign bank account where the penalty can be 50% of the high balance per year for up to 6 years, the costs of establishing the disease as a mitigating factor is worth paying.

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