[co-author: Terence McAllister, Law Clerk]
Tax return filing season is fast approaching, and taxpayers big and small are preparing to file their returns. A recent US Court of Appeals for the Fifth Circuit decision, Haynes v. United States, No. 17-50816 (5th Cir. Jan. 29, 2019), indicates that many of those taxpayers will face uncertainty if their returns are late due to preparer errors or technological issues when electronically filed (e-filed).
The court in Haynes declined to rule on whether the Supreme Court decision in United States v. Boyle, 469 US 241 (1985), applied to e-filing a tax return. The court instead remanded the case to resolve factual issues. In declining to examine the application of Boyle, the decision leaves in place uncertainty for many taxpayers who e-file their returns.
Internal Revenue Code Section 6651(a)(1) excuses a taxpayer from penalties for failure to file a return on time if they show the failure was “due to reasonable cause and not due to willful neglect.” In Boyle, an estate executor hired an experienced lawyer to prepare estate tax returns, but the lawyer failed to put the filing date on the calendar. Nevertheless, the court held that determining a deadline and meeting it did not require any special skills, and therefore relying on an agent was unreasonable. Accordingly, the Court in Boyle did not excuse late filing, and the taxpayer was subject to penalty.
How Boyle applies to e-filing original tax returns remains an open question; Boyle was decided in 1985 when e-filing did not exist. A court tackling this issue in today’s e-commerce environment will likely come up with different reasoning on how “reasonable cause” should apply when an original return is e-filed.
The Electronic Tax Administration Advisory Committee found 79.9 percent of major return types were filed electronically in 2017. The preference toward e-filing is likely due to a combination of convenience and legal mandates. E-filing makes sense economically; the Social Security Administration estimates it costs $0.53 to process a paper-filed W-2 vs. $0.0002 for an e-filed W-2.
Over the last few years, the Internal Revenue Service (IRS) has required e-filing for an ever-increasing number of returns. Currently, all “specified return preparers” must e-file. This definition includes anyone who accepts compensation to prepare returns and expects to file more than 10 returns per year.
Taxpayers who use “specified return preparers” (i.e., almost any paid return preparer) must rely on the preparers to e-file their returns unless they sign and date a written statement. Even those taxpayers who use over-the-counter software to file their own returns rely on intermediaries to transmit the return to the IRS. Online filing providers wear many hats, but one of their main functions is to transmit returns and retrieve notice of acceptance or rejection. Taxpayers may face risks even if these intermediaries operate properly. To process returns, the IRS relies on some of the oldest computer systems in the federal government. The risks this reliance poses were illustrated by a 2018 system crash on the last day of filing season.
The current state of the law has not kept pace with our digital economy. The ever-increasing reliance on e-filing presents numerous questions that are not adequately addressed in cases like Boyle. At the center of this quandary is whether a taxpayer can have reasonable cause where she relies upon a third party to perform a ministerial act, like e-filing an original tax return. A negative response will thwart the efficiencies gained by technology. A positive response will usher in a whole host of proof issues surrounding how to show that the taxpayer reasonably relied on the third-party agent.
In late February, the taxpayer in Haynes filed a petition for rehearing with the Fifth Circuit, specifically focusing on the application of Boyle. This week, the government notified the court that the IRS had refunded the late-filing penalty at issue, effectively mooting the case. Thus, it appears that Haynes will not resolve this open question for the upcoming filing season.
Practice Point: Until the issue is settled, the best course of action is to make sure that: (1) the original return was filed on time and make sure you have proof of that and (2) closely monitor the e-filing to determine if it was rejected for some technical (i.e., some other taxpayer claimed the same dependency deduction for the same dependent) or technological reason.