9th Circuit: Taxpayer Cannot Rely on CPA's Advice on Due Date of Tax Return
Knappe v. Commissioner, No. 10-56904 (9th Cir. Apr. 4, 2013):
When can you trust your accountant's advice about when your taxes are due? That is the question we face today. Appellant Peter Knappe, acting as the executor of an estate, asked his accountant to apply for an extension of the deadline to file the estate-tax return from the IRS. The accountant told Knappe that the deadline had been extended one year, when in fact it had been extended only six months. Acting on the bad advice, Knappe filed the tax return several months late, and the IRS assessed significant penalties against the estate. Knappe initiated this action in the Central District of California, seeking a refund of the penalty. The district court granted summary judgment to the Government on the ground that Knappe had not shown "reasonable cause" to excuse the penalty, as that term is used in § 6651(a)(1). We affirm. ...
Given the vagaries of our famously labyrinthine tax laws, one might assume that hiring a tax expert is the quintessence of "ordinary business care and prudence." On this view, a taxpayer who has solicited the services of a qualified professional and supplied him with the necessary information would be insulated from penalties stemming from the agent's mistakes. After all, one hires a tax expert precisely to avoid having to read even the most straightforward IRS prose.
Taxpayers, however, are not exempt from penalty liability for their agents' mistakes in all cases. In Boyle, the [Supreme] Court drew a sharp distinction between substantive advice on tax law, on which executors may reasonably rely, and nonsubstantive advice, on which executors may not rely. ... The Court also explained that determining the filing date of a tax return is a nonsubstantive matter: "[O]ne does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due. . . . It requires no special training or effort to ascertain a deadline and make sure that it is met."
We conclude that the question of when a return is due—even when an executor has sought an extension—is nonsubstantive. The deadlines here brook no debate. It was clear from the face of Form 4768, from the corresponding instructions, and from the governing statute that the maximum available extension of the filing deadline was six months. ... We reaffirm that an executor may only reasonably rely on an agent's advice about substantive tax matters. Ascertaining a deadline is within the ambit of the executor's nondelegable duties, because a deadline is a nonsubstantive matter. So too is confirming that a needed extension has been sought or obtained. It follows that ascertaining the length of any extension so obtained is equally nondelegable, because ascertaining an extended deadline is no more a substantive matter than ascertaining a default deadline.
As to deadlines, a responsible executor will not allow himself to be misled. When an attorney or accountant tells an executor, "This is the deadline," the executor bears the risk that the advice is wrong. The rule is the same regardless of whether the payment deadline or the filing deadline is at issue, and regardless of whether the agent's erroneous advice results from his misunderstanding of the relevant rules or his negligence in seeking the appropriate extension. Reliance on erroneous advice about nonsubstantive tax law issues cannot constitute reasonable cause for an executor's failure to file a timely return.
We acknowledge that the result today imposes a heavy burden on executors, who will affirmatively have to ensure that their agents' interpretations of filing and payment deadlines are accurate if they want to avoid penalties. This burden is justified by the government's substantial interest in ensuring that returns are timely filed.
Moreover, any other result would reward collusion between culpable executors and their agents. In cases like this one, lawyers and accountants would be incentivized to claim that they gave erroneous advice to the executor whether or not they did in fact. The agent who fell on his sword would risk nothing, because the waiver of the penalty would leave the executor without damages. Even in cases in which executors and their agents did not actively collude to propound a contrived misrepresentation defense, negligent agents would be unilaterally incentivized to persist in giving erroneous advice to their clients, even if they realized their error.
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 he cannot show reasonable cause to excuse the penalty. We therefore affirm the judgment of the district court.
(Hat Tip: Bob Kamman.)
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