Navigating IRS penalties after Boyle

[UNITED STATES] The U.S. Supreme Court's 1985 decision in United States v. Boyle established a stringent standard for taxpayers seeking to avoid penalties for late tax filings. The Court ruled that reliance on an attorney does not constitute "reasonable cause" under Internal Revenue Code § 6651(a)(1). This ruling has significant implications for taxpayers and tax professionals alike.

In Boyle, the Supreme Court addressed whether a taxpayer's failure to file an estate tax return on time, due to reliance on an attorney, could be excused as "reasonable cause." The Court concluded that such reliance does not meet the statutory requirement, emphasizing that taxpayers have a personal obligation to ensure timely filing, regardless of their use of professional assistance.

Chief Justice Warren Burger, writing for the majority, stated that while hiring an attorney is an exercise of "ordinary business care and prudence," it does not relieve the taxpayer of the responsibility to meet filing deadlines. The Court's decision underscores the principle that taxpayers cannot delegate their legal obligations to third parties.

This decision has sparked significant debate over the role of tax professionals in guiding taxpayers through complex filing processes. While tax professionals can offer advice and ensure that returns are accurately completed, the Court’s ruling clarifies that they cannot bear the responsibility for the taxpayer's legal obligations. This has forced many tax preparers to reconsider the scope of their services and the expectations placed on their clients.

IRS Guidelines on Reasonable Cause

Following the Boyle decision, the IRS maintains that to qualify for penalty relief under "reasonable cause," a taxpayer must demonstrate that they exercised ordinary business care and prudence but were nevertheless unable to file or pay taxes on time. The IRS considers various factors, including:

• Death, serious illness, or unavoidable absence of the taxpayer or immediate family
• Fires, natural disasters, or civil disturbances
• Inability to obtain records
• System issues that delayed timely electronic filing or payment

However, the IRS specifies that reliance on a tax professional alone does not constitute reasonable cause. Taxpayers are responsible for ensuring that their returns are filed and payments are made on time, even if they have engaged professional assistance.

In light of this, taxpayers are increasingly encouraged to be proactive in managing their tax obligations. Many experts recommend maintaining close communication with tax preparers throughout the year rather than waiting until the filing deadline approaches. This preemptive approach can help mitigate potential issues and prevent penalties for missing deadlines.

Exceptions and Considerations

While the Boyle decision set a clear precedent, there are exceptional circumstances where taxpayers may be excused from penalties. For instance, if a taxpayer can demonstrate that they were incapable of exercising ordinary business care due to physical or mental limitations, such as incarceration, there may be grounds for penalty relief. Justice Brennan's concurring opinion in Boyle acknowledged that individuals who are physically or mentally incapable of complying with filing deadlines might have a valid claim for reasonable cause.

Additionally, the IRS provides penalty relief for first-time offenders under its "First Time Abatement" policy, which may apply even if the taxpayer's situation does not meet the traditional reasonable cause criteria.

Recently, there has been an increasing push to expand these exceptions, particularly for taxpayers who face challenges due to systemic barriers, such as access to digital filing systems or difficulties obtaining necessary financial records. Advocacy groups argue that the IRS should consider a broader range of circumstances that could affect an individual’s ability to comply, especially in marginalized communities.

Steps to Request Penalty Relief

Taxpayers seeking penalty relief should take the following steps:

1. Contact the IRS: Call the number provided on the penalty notice to discuss the situation.
2. Prepare Documentation: Gather supporting evidence, such as medical records, court documents, or proof of natural disasters.
3. Submit Form 843: If relief is not granted over the phone, complete and submit IRS Form 843, "Claim for Refund and Request for Abatement," along with the necessary documentation.
4. Appeal Denials: If the request is denied, taxpayers have the right to appeal the decision through the IRS appeals process.

It's important to note that the IRS does not grant penalty relief for all types of penalties. For example, penalties related to estimated tax underpayments are generally not eligible for relief under the reasonable cause criteria.

Taxpayers are also advised to consult with legal or tax professionals before submitting their requests for relief. In some cases, the complexities involved in presenting a "reasonable cause" argument require expert advice, particularly when dealing with nuanced situations like multi-jurisdictional filings or international tax issues.

The Boyle decision reinforced the principle that taxpayers bear the responsibility for timely filing and payment of taxes. While the IRS allows for penalty relief in cases of reasonable cause, taxpayers must provide compelling evidence that they exercised ordinary business care and prudence but were nevertheless unable to comply. Understanding these guidelines and taking proactive steps can help taxpayers navigate the complexities of tax compliance and avoid unnecessary penalties.