What Happens if Your Accountant Fails to e-File Your Tax Extension Request?
April 15 may be known as Tax Day, but every year, millions of taxpayers file tax extension forms to request more time to complete their tax returns. Many of those taxpayers don’t file the forms themselves. Instead, they rely on accountants to e-file the tax extension request on their behalf. But what happens if your accountant misses the e-filing deadline? Will you be responsible to the IRS for the late filing penalties?
Family Accountant Fails to e-File Tax Extension Request
Erik and Aspasia Oosterwijk had been working with their CPA, Ernie Paszkiewicz of Gross, Mendelsohn, and Associates for a decade. The couple owned a Broadway Market meat stall which over the course of more than two decades had grown into a successful meat wholesaler. In 2017, they sold the business. The proceeds from that sale meant their 2017 tax returns were far more complicated than usual. Their accountant planned to file IRS Form 4868, an Application for Automatic Extension of Time to File U.S. Individual Income Tax Return before Tax Day (April 17 that year). He warned the Oosterwijks that when he did so, the $1.8 million they owed in taxes would be automatically deducted from their bank accounts.
But then it wasn’t. They contacted their accountant on April 25, 2018, who told them to keep waiting. On April 29, they contacted him again. The following day, the accountant discovered that he had not actually e-filed the tax extension request before Tax Day as he had promised. He told them that if they filed the request at that moment, they would still have six months to file their tax returns and the penalties for late filing would halt. The Oosterwijks followed that advice, immediately mailing a paper Extension Request along with a check for $1.8 million to the IRS. It was processed on May 4. Two months later, on June 29, the Oosterwijks e-filed their 2017 tax returns, well in advance of the October 15, 2018 extended deadline.
However, when the IRS assessed its “Failure to Pay” penalties, it did so as if the Extension Request had never been filed. The government assessed three penalties covering the period between April 18 and June 29 totalling $274,634.73.
How Are Failure to Pay Penalties Calculated Without an Extension Request?
The penalty assessed against the Oosterwijks may seem extreme, given that they paid the outstanding amount within a month and filed their tax returns by the end of June. Here is how those amounts were calculated:
Failure to Pay Penalties
The first IRS penalty was for a failure to pay the amount owed on time. This penalty is calculated at a rate of 0.5% of the amount of tax owed if it is less than 1 month late, plus an additional 0.5% for each additional month (or partial month) the failure to pay continues, up to 25% in the aggregate. The Oosterwijks’ penalty of $8,859.19 covered one month – from Tax Day to May 4, when their $1.8 million check was posted.
Failure to File Penalties
Next, the IRS assessed a penalty because the Oosterwijks failed to file their tax return. That amount is calculated at a rate of 5% of the tax owed for the first month, plus an additional 5% each additional month (or partial month) the failure to file continues, up to 25% in the aggregate. Based on their accountant’s bad advice, the Oosterwijks were three months late in filing their tax return, so they faced $256,916.36 in failure to file penalties. The IRS also assessed an additional “failure to file” penalty in the amount of $8,859.19, but the reason for that penalty was not explained.
Can Penalties be Forgiven if Your Accountant Fails to e-File Your Tax Extension Request?
The Oosterwijks sought forgiveness, but they had already used their First Time Penalty Abatement to forgive a $7 late payment penalty in 2014. After months of negotiations with the IRS, and a conference with an IRS Appeals Officer, the government agreed to abate half the penalties. Still, the Oosterwijks owed $137,317.37. They paid the penalty and then filed a complaint in the United States District Court for the District of Maryland seeking a refund.
At court, the Oosterwijks asked for relief from the failure to file and failure to pay penalties because they said they reasonably relied on their accountant to e-file their tax extension request, and on his substantive advice that the failure to file penalties would halt once their late Extension Request was processed. This blog has addressed taxpayers’ liability for taxes and penalties resulting from CPA errors before. The statute allowing for failure to file penalties does include an exception if “such failure is due to reasonable cause and not due to willful neglect.” However, to take advantage of the “reasonable cause” exception, the taxpayer must prove:
- That there was no willful neglect, meaning “a conscious, intentional failure or reckless indifference,” and
- The taxpayer “exercised ordinary business care and prudence but was nevertheless unable to file the return within the prescribed time.”
Here again, the Court said that taxpayers have an “unambiguous” independent duty to make sure their taxes get filed on time. The fact that they hired an attorney or accountant to perform the ministerial act of filing the extension request form did not forgive the Oosterwijks’ failure to file.
The fact that the form was supposed to be e-filed did not change this determination. In 2018, taxpayers did not have access to the same e-filing system used by accountants and CPAs to e-file taxes. There was no way the Oosterwijks could have confirmed that an extension request had been filed on their behalf. Nonetheless, the Court said that they could always have sent a paper extension request in anyway, just as they did one month later.
Does a Late Tax Extension Request Stop Failure to File Penalties?
The bulk of the Oosterwijks’ penalties came from the three month delay in filing their tax return. Their accountant had told them a late tax extension request would stop the penalties from accruing. This was wrong. The Court stated that in order for a tax extension request to be valid, it must be submitted before the tax filing deadline. A later tax extension request does nothing to excuse the failure to file or put a stop to the penalties assessed. It was not willing to forgive the penalties based on their accountant’s bad advice, saying that advice contradicted a deadline plainly stated on the tax return forms themselves. The Oosterwijks’ complaint was dismissed, and they were required to pay the full balance owed to the IRS.
Tax Day is approaching fast, and that means taxpayers and accountants need to be vigilant about whether their tax extension requests have been filed correctly, and on time. Otherwise, taxpayers could face thousands of dollars in failure to file penalties just because their accountants failed to e-file their tax extension request forms.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have been required to pay significant penalties due to reliance on professional advice and are considering filing a refund action in federal court in order to prove “reasonable cause,” contact Joe Viola to schedule a free consultation.