- Relying On Accountant's Incorrect Advice about the Length of a Filing Extension Is Not Reasonable Cause for the Late Filing
- April 15, 2013
- Law Firm: Kronick Moskovitz Tiedemann Girard A Law Corporation - Sacramento Office
In Knappe v. United States (--- F.3d ----, C.A.9 (Cal.), April 04, 2013), the United States Court of Appeals considered whether the executor of an estate could show reasonable cause for filing an estate tax return past the legal deadline, and thereby avoid penalties for the late filing, because he received faulty advice from his accountant as to the length of the filing extension. The court ruled that filing deadlines are ascertainable and that incorrect advice about them is not "substantive advice" that executors of estates can fault for failing to meet the deadlines.
Following the death of Ingeborg Pattee on November 30, 2005, her friend and business associate Peter Knappe became executor of her estate. For assistance in preparing and filing the estate's tax returns, Knappe enlisted the help of Francis Burns, a certified public accountant with whom he had a business relationship. Burns correctly advised Knappe that the deadline to file the estate tax return was nine months from the date of Pattee's death, August 30, 2006.
Neding more time to obtain real estate appraisals, Knappe asked Burns to apply to the Internal Revenue Service ("IRS") for extensions, both for filing the return and for paying the estate's taxes. IRS Form 4786 allows for a six-month extension for filing the return, and a one-year extension for making payments.
Burns filed for the extensions on August 30, 2006. However, Burns misunderstood the deadlines and wrongly told Knappe that he could obtain one-year extensions for both paying the tax and filing the return. Incorrectly believing that the filing deadline had been extended a full year, Knappe filed the return on May 29, 2007, well past the actual six-month deadline. When the IRS discovered the late filing, it assessed the estate a 20 percent penalty of $196,414.60.
Knappe requested an abatement of the penalty arguing that his reliance on Burns' incorrect advice established a reasonable cause for the late filing. The IRS denied the abatement request and Knappe's administrative appeal. Knappe brought action in federal district court which granted summary judgment for the IRS. Knappe appealed.
The Internal Revenue Code allows penalties for late filings to be abated if the failure to file was "due to reasonable cause and not due to willful neglect." The question was whether Knappe's reliance on his accountant's erroneous advice was "reasonable cause" or "willful neglect."
Courts have answered that question by placing delinquent returns in one of two categories. The first category involves cases with taxpayers who delegate the task of filing a return to an expert agent who fails to meet the deadline. In this category, the burden for filing on time is placed squarely on the executor, not on an agent or employee of the executor. Such failure would constitute willful neglect because "reliance cannot function as a substitute for compliance with an unambiguous statute."
The second category involves cases in which a taxpayer relies on an agent's erroneous substantive advice that no tax liability exists or no return is due. In these cases, when an accountant or an 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 and this does constitute reasonable cause for delay. This case did not fall squarely into either category as Knappe neither delegated the task of filing the return to a neglectful agent nor received mistaken advice that no taxes were due. Rather, he personally filed the return after the actual deadline upon receiving Burns' faulty advice.
The court determined this case is more like the first category than the second. Courts have consistently held that deadlines for filing are readily ascertainable and failure to adhere to them is not a result of heeding "substantive" advice from an expert, such as whether a liability exists. The court found Knappe's failure was not the result of heeding "substantive" advice. It was Knappe's duty to ascertain the correct extended filing deadline. By relying on his accountant's advice about that nonsubstantive matter, he failed to exercise ordinary business care and prudence and cannot show reasonable cause to excuse the penalty.
The judgment was affirmed.