The U.S. Supreme Court, in Knappe, is being asked to revisit its decision in a case where it stated the standard for what constitutes reasonable cause based upon reliance on advice of professionals. In Boyle the Court stated:
“When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice”
The challenge is being brought by the executor of an estate who was subject to late filing and late payment penalties for not filing an estate tax return timely and not paying the tax due timely. The executor claimed that he reasonably relied on advice of counsel regarding the due date of the return and due date for payment
The Ninth Circuit relying on Boyle found that the reasonable cause defense to the penalty was inapplicable because, as stated in Boyle:
“By contrast, one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due. In short, tax returns imply deadlines. Reliance by a lay person on a lawyer is of course common; but that reliance cannot function as a substitute for compliance with an unambiguous statute”
This case has nuances which are important for all practitioners and fiduciaries to recognize. The determination of whether a return, including information returns, like FBAR’s, Form 8938, (Report of Specified Foreign Financial Assets), Form 5471 Report of Controlled Foreign Corporation) or other filings are due may be a matter of substantive law determination, but the due dates are not once the filing obligations are determined.
As the executor in Knappe has found out, being a fiduciary brings with it risks. As the IRS and DOJ focus more intensely on international issues, and aggressive penalty assessments, (including the 50% FBAR penalty) knowing who to rely on and when to rely on professional advice is extremely important. The executor in Knappe, may well be reflecting on the statement of Knight Templar in Indiana Jones and the Last Crusade stated, “… he chose poorly”.