Late Estate Tax Returns
Posted Wednesday, May 29, 2013 by John S. Palmer
When an estate may rely on the advice of an attorney or accountant to avoid penalties for failing to file a timely estate tax return is not as clear-cut as you might think.
For decedents who die with a taxable estate, a federal estate tax return, IRS Form 706, must be filed within 9 months of the decedent’s death. An executor may apply for an automatic 6-month extension of time to file if the extension is requested on or before the due date. Additional extensions of the filing deadline are only available if the executor is outside of the U.S.
Extensions of the deadline to actually pay the tax operate are a different matter. The IRS may grant up to ten consecutive one-year extensions of the payment deadline if the executor can establish why it is impossible or impractical to pay the full amount of the tax by the due date.
A late-filing penalty is mandatory when an executor fails to file any return by the due date, including any extensions, unless it is shown that such failure is due to “reasonable cause and not due to willful neglect.” The penalty is five percent of the amount of tax for each month or fraction of a month that the return is late, up to a maximum of 25 percent.
The leading case on the issue of when an executor may rely on the advice of an attorney or accountant regarding the due date for the return is United States v. Boyle, 469 U.S. 241 (1985), in which the court stated:
When an accountant or 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. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a “second opinion,” or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place. “Ordinary business care and prudence” do not demand such actions.
By contrast, one 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. In short, tax returns imply deadlines. Reliance by a lay person on a lawyer is of course common; but that reliance cannot function as a substitute for compliance with an unambiguous statute… It requires no special training or effort to ascertain a deadline and make sure that it is met. The failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not “reasonable cause” for a late filing.
Two recent cases illustrate how difficult it can be to distinguish legal advice involving an interpretation of substantive tax law, which can constitute reasonable cause for missing the filing deadline, from mere assistance in meeting the requirements of an unambiguous statute, which cannot.
In Estate of Liftin v. U.S. (decided March 29, 2013) the Court of Federal Claims held it was reasonable for an executor to miss the filing deadline by 14 months based on his attorney’s advice to delay filing the return until the surviving spouse became a U.S. citizen because doing so enabled the estate to claim a marital deduction for property left to her by the decedent. The court found reasonable cause for the executor to rely on the attorney’s advice because it “concerned a substantive question of tax law regarding the interaction between the statutes and regulations providing for the marital deduction and the statutes and regulations setting the deadline for filing the Estate’s return.”
However, the court went on to rule that it was unreasonable for the executor to wait another nine months to file the return while it settled a claim filed against the estate by the surviving spouse. Although the attorney had advised the executor that the additional delay would ensure the estate had sufficient information to file an accurate return, the court found that this advice did not involve an interpretation of substantive tax law. (The court also noted that permitting unresolved issues to delay filing a tax return would give taxpayers a loophole to avoid filing returns indefinitely without penalty.) Therefore, the court upheld imposition of the maximum late-filing penalty of 25%.
In Knappe v. U.S. (decided April 4, 2013), the 9th Circuit Court of Appeals upheld imposition of a late-filing penalty where an accountant obtained a 6-month filing extension but erroneously told the executor he had obtained a one-year extension. The executor argued that he relied on the accountant’s “substantive advice” regarding the deadline, but the court did not buy it:
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.
The court went on to say that that “a responsible executor will not allow himself to be misled” about a filing deadline, and bears the risk that an agent’s advice about the deadline is wrong.
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