Does E-Filing Change Late Tax Filing Penalties?

Our tax law imposes penalties on taxpayers who fail to file tax returns or pay taxes on time, unless the taxpayer can show “reasonable cause” for the delay.

In United States v. Boyle, the Supreme Court established a bright-line rule that reliance on an accountant or agent does not constitute “reasonable cause.” There are nuances to this rule where courts have allowed exceptions consistent with Boyle. The court cases have not focused on the e-Filing aspects of tax returns.

The IRS requires some tax preparers e-File tax returns. It’s mandatory. And the IRS is starting to hint that it may eliminate the option to paper-file altogether. This is why issues involving e-Filing are important and this question is timely. Do the decades-old rules for late tax returns from the paper filing era apply to e-Filing?

The recent Lee v. United States, No. 22-10793 (11th Cir. Oct. 24, 2023), case addresses this very issue. It considers the late filing penalty for returns filed late due to the complexities of the e-Filing process.

Facts & Procedural History

The taxpayer in this case hired a CPA to prepare and e-file his 2014-2016 tax returns. Each year, the taxpayer reviewed the returns, signed IRS Form 8879 authorizing e-filing by the CPA, and made tax payments to the IRS.

As far as the taxpayer knew, he was overpaid. He had made payments to the IRS and asked that those be applied to each subsequent year.

Unfortunately, the CPA never submitted the e-filed returns. This isn’t a case where the taxpayer could have seen the late filing and taken steps before the due date. The taxpayer only learned of this failure in 2018 when the IRS assessed over $70,000 in failure-to-file and failure-to-pay penalties. The penalties were triggered given that the time for recouping the payments the taxpayer made to the IRS expired (and the time for filing a refund had passed). So the taxpayer lost his overpayment, and then without the carryforward payment reported in the subsequent years, he had a balance due. The penalties were imposed based on the balance due.

The taxpayer asked the IRS to remove the penalties based on reasonable cause, which it declined to do. He then sued the IRS for a refund, arguing he had reasonable cause since he relied on his CPA to e-file the returns. The district court had to consider whether the existing law for paper-filed returns applies to e-Filed returns. The district court held that they did, which triggered this appeal.

About Late Filing Penalties

The tax code authorizes the IRS to impose penalties on individual taxpayers who fail to file their income tax returns by the due date. This is known as the “failure-to-file” penalty under Section 6651(a)(1).

The amount of the failure-to-file penalty is generally 5% of the tax due for each month or partial month the return is late, up to a maximum of 25% of the unpaid tax.

The penalty calculation depends on the tax return filing deadlines and rules. The due date for filing individual income tax returns is normally April 15 following the close of the calendar year. However, taxpayers can obtain an automatic 6-month extension to file by submitting Form 4868 by the original due date. This extends the deadline to October 15. Taxpayers can request an additional filing extension by filing Form 2688, but must demonstrate reasonable cause for needing more time beyond the automatic extension.

There is a reasonable cause defense available if the failure-to-file penalty is imposed. The IRS should not assess the penalty if the taxpayer shows they had “reasonable cause” for missing the filing deadline. It should remove the penalty if the taxpayer can show reasonable cause. What constitutes reasonable cause is often disputed between taxpayers and the IRS.

Reasonable Cause for Late Filing

The tax code does not define the term “reasonable cause” for late filing exemptions. Over time, the courts have developed guidance on what constitutes reasonable cause through case law precedents.

In general, reasonable cause requires the taxpayer to show they exercised ordinary business care and prudence but were nevertheless unable to file their return by the deadline. As the Supreme Court held in United States v. Boyle, 469 U.S. 241 (1985), merely relying on an accountant or other agent to file the return does not amount to reasonable cause.

Under Boyle, the duty to file by the deadline lies solely with the taxpayer. This bright-line rule means taxpayers cannot claim reasonable cause based only on delegating the filing to an agent who then misses the deadline. However, Boyle left open whether a taxpayer demonstrates reasonable cause if, acting on the advice of counsel, they file after the actual deadline but within the extended time the adviser incorrectly stated was available.

Subsequent cases have further clarified reasonable cause for late filing. In Estate of Hake v. United States, No. 1:15-CV-1382 (M.D. Pa 2017), the court found reasonable cause where executors relied on an attorney’s mistaken advice about the filing deadline. This can allow for abatement of penalties for reasonable cause–which you can read about here. Other factors like illness, incapacity, or postal delays can also constitute reasonable cause if they prevent timely filing. But the taxpayer must show they exercised ordinary prudence and care despite the impediment.

These concepts all apply to paper-filed tax returns. What about e-Filed tax returns?

Does e-Filing Change the Boyle Rules?

On appeal, the taxpayer argued that Boyle and similar cases should not apply to e-Filed tax returns. The taxpayer argued that the e-Filing process fundamentally differs from paper filing and, therefore, the same limitations for penalty abatements do not apply for e-Filed returns.

The taxpyer is correct that there are different rules for e-Filed returns verus paper-filed returns. Most of these rules are not optional. If a tax return preparer expects to file 10 or more individual tax returns in a year, they are deemed a “specified tax return preparer” under IRS regulations. Specified tax return preparers must e-File returns rather than paper file. This is getting ahead of ourselves, but the appeals court did not put any weight on this fact. It noted that the taxpayer could still opt to paper file by filing without his CPA.

This is not the only difference, however. To e-File a return, the taxpayer must complete Form 8879 authorizing the electronic return originator (“ERO”) to submit the return. An ERO is authorized by the IRS to transmit e-Filed returns. The ERO may also be the tax preparer, but IRS rules distinguish between preparing and transmitting returns. The rules for EROs prohibit the ERO from sitting on returns for more than 3 days before filing them.

The taxpayer here claimed he exercised care by having his CPA prepare the returns, signing the e-File authorization form, and making payments. Once he signed Form 8879, he asserted there was nothing left for him to do and that he effectively transferred the filing obligation to his ERO. That would seem logical. An ERO is really an agent of the IRS–an extension really. And Boyle does not address transferring responsibility to an ERO.

The Eleventh Circuit did not pick up on the fact that EROs are de facto agents for the IRS. Instead, it noted its disagreement that the e-Filing process changes the Boyle rule. It held that the legal duty to ensure timely filing remains solely with the taxpayer, regardless of e-filing:

Complex tax situations and tortuous e-filing procedures are not disabilities that divest a taxpayer of the faculties needed for ordinary business care or prudence.

This is contrary to some other guidance that suggests that complexity does in fact change the rules.

Nevertheless, according to the court, signing an authorization form does not complete the filing—the taxpayer must confirm the IRS receives and accepts the e-filed return. Failure to do so means reliance on an ERO is insufficient for reasonable cause.

Takeaway

This case highlights that the rise of mandatory e-Filing has not changed the basic duty of individual taxpayers to ensure the timely filing of their returns. While specifying that return preparers must e-File introduces new parties like EROs into the process, the legal liability remains with the taxpayer. Relying solely on an accountant or ERO to handle e-filing does not relieve taxpayers of their personal responsibility to confirm returns are received and accepted on time. Otherwise, failure-to-file penalties will still apply.