Court Has No Mercy For Botched Estate Tax Payment Extension


In a recent appellate case, the 9th Circuit Court of Appeals upheld the trial court in applying failure to pay penalties for late estate taxes, even though a request for extension of payment could be inferred from an extension request filed by the taxpayer.

FACTS. An estate executor hired an accountant to prepare a federal estate tax return. Due to the inability to obtain the release of liquid funds in a timely manner to pay the tax, the accountant submitted a Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer Taxes). This Form allows for an automatic extension of 6 months TO FILE, and the taxpayer can further use it to request an extension of time TO PAY of up to 12 months. The Form submitted to the IRS did not complete Part III of the Form which is entitled 'Extension of Time to Pay." It appears that the estate did not check any of the boxes in Part III, and the field labeled "Enter extension date requested" was left blank. However, the accountant did include a letter with the Form indicating that an extension of time to pay was needed and providing the reason, but again, no specific date for the extension to run to was included. Interestingly, the request estimated the tax due at $131,327 - when the return was ultimately filed the actual tax due was $1,684,408. Due to late payment, a penalty of $58,954 was imposed, along with interest of $69,801. The taxpayer raised several reasons why the penalty should be abated - principally the doctrine of substantial compliance, collateral estoppel, and reasonable cause. The court found that none of these reasons justified removing the penalty.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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