The U.S. Supreme Court recently refused to hear an appeal from the Ninth Circuit Court of Appeals in Knappe v. United States of America, 713 F.3d 1164 (9th Cir., 2013), cert denied, 134 S. Ct. 422 (2013). The issue was whether an estate could rely on the advice of a CPA as to when a return was due to avoid the penalty for the late filing of a tax return. The Ninth Circuit held that it could not.
An estate tax return is generally due within nine months of the decedent's death. IRC Section 6075(a). The estate tax is due when the tax return is due. IRC Section 6651. The estate is entitled to an automatic six month extension of time to file the return and an extension of a “reasonable period of time,” not to exceed one year, to pay the tax.
In this case, the executor of the estate needed additional time to file the return. His CPA advised him that he could secure extensions of one year to both file the return and pay the tax. The executor had no reason not to believe him so, without further investigation, he proceeded on the basis that he had an additional year to both file the return and pay the tax.
The CPA filed the forms (Form 4768) to secure extensions, and the IRS approved the extensions. The CPA gave the executor copies of the extensions. It appears that neither the CPA nor the executor noticed that the extension of the time to file was for only six months.
The executor filed the returns before the one year expired, but after the actual six-month extension date. As a result, the IRS assessed a late filing penalty of 20% for filing the return after the actual due date.
Relying on a CPA for advice as to whether a return needs to be filed is generally seen by the IRS and the courts as reasonable cause for a taxpayer's action and justifies relief from a late filing penalty. The problem here was that the advice was not whether a return was due, but when it was due.
The Court identified two common situations involving advice from a CPA. The first is reliance on a CPA to do the physical task of filing the return (a non-substantive issue). The CPA's failure to file the return does not qualify for relief from the late filing penalty as a taxpayer cannot delegate his or her duty to file a return. The second situation is when a CPA advises a taxpayer that no return is due (a substantive issue). This is reasonable cause for failing to file a return as a taxpayer can usually rely on an expert's advice on a substantive issue.
The Ninth Circuit noted that the facts before it did not decisively fall into either category. The executor did not try to delegate the duty to file the return nor was there erroneous advice about whether a return was due. The erroneous advice given was that a return was due, but not until one year after the actual due date. Unfortunately, the Court concluded that this was more of a non-substantive issue and the taxpayer had no right to rely on the opinion of an expert.
While relying on a CPA, attorney, or other expert can be a good basis to prove reasonable cause, take the time to distinguish whether the advice was substantive (e.g., advice on a legal issue) or non-substantive (e.g., advice on something that does not need an expert's opinion).