Bad advice may excuse penalty for estate return filed late

The courts may abate or cancel certain penalties for “reasonable cause”, but it is difficult to define reasonable cause.

In the Estate of John R.H. Thouron, the attorney gave bad advice and the estate relied on that advice. The attorney said the death tax return, form 706 was due nine months after death and that was correct. The attorney also said the estate could file and pay the death tax late if they filed an Extension of Time to File-form 4768 at the same time the return was filed. That is not correct.

The estate filed and paid the form 706 late. The Internal Revenue Service charged about $999,072 of penalties and interest. The estate appealed the penalty (and related interest) to IRS, but was denied. The estate filed form 843 for a refund but IRS did not respond to that. So, the estate sued for a refund in district court.

The estate told the district court it relied on the erroneous advice of a hired professional. But that court did not find it qualified as “reasonable cause” so no refund.

The estate then appealed to the Third Circuit Court of Appeals. It said prior cases identified three distinct categories of late filing and late payment cases. The first category was if a taxpayer relies on an agent for the ministerial task of filing or paying was not reasonable cause.

However, the appeals court held a taxpayer’s reliance on the advice of a tax expert may be reasonable cause for late paying and if the taxpayer can show an inability to pay or undue hardship from paying at the deadline. This case had a dispute of material facts as to whether that reliance occurred. The Third Circuit Appeals court sent the case back to the district court to do fact-finding.

The 99-year-old decedent only left some grandchildren who were not familiar with his business affairs and needed help to untangle them.

We will see what the district court determines as to whether the estate qualifies for relief from the penalties for late filing and paying (and related interest).

This is another illustration of sometimes it is best to be sure the hired professional is giving good advice. The nine-month deadline for filing form 706 is important and if the return will not be filed on time an Extension of Time to File-form 4768 should be filed before the nine months expire. The IRS actually prefers the extension be filed about a month before the deadline.

If possible, the estate can pay an estimated amount with the extension. If it is too much, a refund will be paid to the estate.

Did you hear? “Questions are never indiscreet. Answers sometimes are.” - Oscar Wilde.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.