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Discussion:S corp Late filing penalty - I.R.M.

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Discussion Forum Index --> Tax Questions --> S corp Late filing penalty - I.R.M.


BoulderDoug (talk|edits) said:

2 April 2014
I have a client who missed their filing date for the second time. I put together an appeal (using some of the suggestions in Chris' article), but it didn't go well at the appeals hearing. They basically were adamant that as the IRM says ignorance of the dates is not reasonable cause, that's it.

My question for here is what weight is the IRM given once the issue leaves their kingdom and goes into the judicial process?

Also, I was told that penalties can't be adjudicated in Tax Court. Is that true?

Tkx.

JR1 (talk|edits) said:

April 2, 2014
I thought there was a Rev Proc from a year ago that covered that now...

Ckenefick (talk|edits) said:

2 April 2014
Don't rely on Ck here, he's a total jackass.

Also, I was told that penalties can't be adjudicated in Tax Court. Is that true?

Not as a general proposition. If the penalty is subject to deficiency procedures, you can take it up in Tax Court. But I don't believe the 6699 penalty fits the mold. I think it's a 'notice and demand' variety, but check me on that.

And give us the facts here...

BoulderDoug (talk|edits) said:

2 April 2014
Thanks. Here is the "facts" section of my appeal. I can send the whole letter with Court Cases and other authority if you want, but don't want to take up the whole website.

"XXXXXX is an LLC that was taxed as a C corporation in its first year of 2005. In 2006, it make a valid S election and has been taxed as such ever since. It is owned 50/50 by spouses XXXXX and XXXXXX XXXXXXX. The returns from 2005 thru 2008 were filed between June and September of the following year. In 2009, the return was filed after the September 15th due date for corporate returns but before the October 15th due date for individual returns. As the return was filed one month late, there was a $178 penalty assessed. Subsequent to that, the shareholders have made more of an effort to get the accounting information to the preparer sooner. In 2011, it was given to the preparer in time for him to not have to extend the return and in 2012, the information was delivered to me in early April of 2013.

I had prepared XXXXXXX's Form 1120S since its inception thru the 2009 tax year. In most, if not all of those years, I did not receive the information necessary to properly prepare the return before the March 15th unextended due date. As a result, I filed Form 7004 extending the due date to September 15th. This is consistent with the communication that I send in January of each year to my clients with their organizer. The relevant part of the letter states that “One item of emphasis is that if you started an S corporation, partnership, or LLC in 20XX, please let me know immediately. The filing penalties for late filed “pass-thru” entities are $89 per shareholder/partner/member per month, so we don't need that. I will extend any unfiled returns that I prepared in 2008 so those will be taken care of (emphasis added). If there is any uncertainty, please contact me.” As a result, the taxpayer was not aware that the unextended due date for XXXXXX was different from the unextended due date for their 1040. They relied on me to take care of any extensions that were needed.

In 2010 and 2011, they had another tax professional prepare their S corporation and individual returns. In 2011, both of these returns were filed before their respective unextended due dates. For the 2012 tax year, I did not file an extension for XXXXXX as I inferred that the other tax professional would again be doing their returns. They contacted me in the first week of April 2013 to do their 2012 returns and I asked them if XXXXXX had been extended. They had not filed an extension and I immediately understood that XXXXXX would be filed late. I moved the return to the head of the line and, when it had been prepared, I instructed them to mail it in a manner so that they would have documentation that it arrived no later than May 14th, 2013, which they did. We received the CP162 letter dated July 1, 2013 charging a penalty of $780. We responded with a request for abatement which was turned down."

DaveFogel (talk|edits) said:

2 April 2014
As I read your explanation, you assumed that the other preparer would prepare the 2012 return, and instead, the client came to you without sufficient time to prepare and file the return by the due date. You didn’t obtain an extension. Where’s the reasonable cause?

The case you’re asking about is probably Ensyc Technologies v. Commissioner, T.C. Summary Opinion 2012-55 (a case that can’t be cited as precedent). In this case, the Tax Court held that there was reasonable cause for the late filing of an S corporation’s return because its president timely mailed the Schedules K-1 to the shareholders, and one of the shareholders filed a timely individual income tax return that reflected the information shown on the Schedule K-1. In essence, the Tax Court applied the relief for a partnership (described in Rev. Proc. 84-35) to an S corporation.

Ckenefick (talk|edits) said:

2 April 2014
Where’s the reasonable cause?

Well, we'll have to come up with something...And, I have long held that 84-35 should be equally applicable to S-corporations. That Rev Proc was written before we had a penalty for the late filing of S-corporation returns. So, I would make that argument, and I would cite Ensyc, despite the lack of precedent Ensyc provides (in a courtroom). You can stipulate that the couple filed their 2012 personal returns on time, correct?

They basically were adamant that as the IRM says ignorance of the dates is not reasonable cause, that's it.

That's pretty much been the Tax Court's position on the matter (absent professional advice). In other words, if there's a mistaken belief, but no professional advice was given to create that mistaken belief (i.e. the taxpayer just thought the accountant would handle the matter), then the reliance defense won't hold up. But you're not really making a reliance argument. Yet, you are arguing mistaken belief. And, when it comes to a deadline, we run up against Boyle, which involved the late filing of an estate tax return and which is what the IRM provision is based on.

http://www.law.cornell.edu/supremecourt/text/469/241

But I think you can distinguish Boyle because in Boyle, the penalty was the result of the late paid tax. With an S-corp, there is no tax. Thus, the policy outlined in Boyle is therefore different:

Congress' purpose in the prescribed civil penalty was to ensure timely filing of tax returns to the end that tax liability will be ascertained and paid promptly.

Note the words, "to the end."

I should also point out that other courts haven't agreed with the Tax Court on this matter...and maybe this is where your citations and court cases fit in...maybe you can gives us a short run down on them.

I have a few other thoughts...

Ckenefick (talk|edits) said:

3 April 2014
One of my other thoughts, which I will tell you now, revolves around the S-corp and partnership extended due dates. Not too long ago, 1065's could be extended for 6-months, all the way up to 10/15. This changed. The reason for the change was so that the K1 recipients would have sufficient time to prepare their own returns. Obviously, if a partnership could issue a K1, for example, on 10/15, there'd be no way really for the partner to file his/her/its own return on time (especially if a tiered partnership situation is involved). So, the obvious reason for the change was to promote the timely filing of the ultimate partner's return, which is the return, at the end of the day, that would involve a tax liability.

This change tells me that the real focus here is on the "ultimate" return that is to be filed. 84-35 basically recognizes this truth, but 84-35 came out before the partnership extended due date change.

So, this is another reason why 84-35 should apply to S-corporations...because the end game is to get the ultimate partners to file on time. And if the partners filed their 1040's on time (and the other requirements of the RP are met), no harm, no foul. There is no reason this rule shouldn't apply to S-corporations, which are pass-thru's just like partnerships. In addition, S-corp's are more restrictive with the "who can be an owner" issue (although 84-35 only applies when all partners are "individuals," formerly known as "natural persons").

BoulderDoug (talk|edits) said:

3 April 2014
Dave, the client first contacted me in late March, after the due date for S corps. I'll post more later, but obviously, this will have to wait right now.

BoulderDoug (talk|edits) said:

3 April 2014
Sorry, I hit send. Once we agreed on the facts, the only thing they stood on was their IRM. Not all of the other cites I had in the appeal letter.

EADave (talk|edits) said:

3 April 2014
Maybe if more of us, practitioners, write these abatement letters (as a last resort obviously) indicating the language in 84-35 we just might convince TPTB to include S Corps in the Rev Proc. We need someone to take this to the TC, me thinks.

DaveFogel (talk|edits) said:

3 April 2014
I'm not convinced that the IRS is willing to apply Rev. Proc. 84-35 to S corps. Recently, I tried to get a $7K penalty abated for a late-filed 1120S (zero income, zero loss) where the shareholder timely-filed his return, but the service center rejected my request (I cited both Rev. Proc. 84-35, the Ensyc Technologies case, AND made a case for reasonable cause). I appealed, and the appeals office sustained the rejection.

Fortunately, the corporation had ceased conducting business many years before, did not transfer any assets to the shareholder, so my advice was to not pay the penalty since IRS won't be able to collect it.

Ckenefick (talk|edits) said:

3 April 2014
I'm not convinced that the IRS is willing to apply Rev. Proc. 84-35 to S corps.

I'm not either. And, there's been a recent flurry of activity where IRS isn't even applying the RP to qualifying partnerships!

Ckenefick (talk|edits) said:

4 April 2014
Ok, I took a look at Ensync again. Dave has cited that case before, and it's a good one, but I forget how the thing got to the TC. I mentioned I had some additional thoughts...and one of them is what Ensync did...but I'm not 100% sure it will work in Boulder's case. Anyway, it would go like this:

We'd have to get to a CDP Hearing, like Ensync did. I don't think we can do it any other way. Per 6699(d):

Deficiency procedures not to apply.

Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty imposed by subsection (a).

So, we'd have to wait for the levy notice to come, then we request a CDP Hearing. And then, as part of that Hearing, we present an OIC as a collection alternative...maybe an ETA offer...maybe offering $178...the same $178 that the IRS waived with respect to taxpayer's first failure. In essence, we're asking for a waiver of the current (second) penalty and are willing to undo the waiver from the first penalty. Fair enough, right?

Now, you're probably gonna say: Isn't Boulder's case different from Ensync in that Ensync went straight to CDP without running through (regular) Appeals first? And, you might be right. In other words, IRS might contend that Boulder's client had a prior opportunity to dispute, the issue was was raised and considered in the prior appeals conference, etc. But then we get into some real technical stuff here, where we could really give the IRS a hard time if we wanted to...and it sounds like Boulder might want to.

As part of this technical stuff, note that Boulder isn't really challenging the liability. He agrees it should be imposed. But he also believes it should be waived, after being imposed, based on reasonable cause criteria. So, technically, he's not challenging the liability and he never did. Also, technically, it seems the IRS did not "consider" the relevant criteria in the regular appeals conference...

So, if Boulder can get through CDP, even if he loses, no problem. Pay the $60 and go to TC (and don't file it as a Small Tax Case). If it will work, it is just a very indirect, circuitous and long route.

DaveFogel (talk|edits) said:

4 April 2014
Boulder isn't really challenging the liability. He agrees it should be imposed. But he also believes it should be waived, after being imposed, based on reasonable cause criteria. So, technically, he's not challenging the liability and he never did.

Bull. Arguing that the client isn't liable for the penalty is, per se, challenging the liability.

Ckenefick (talk|edits) said:

4 April 2014
I can't really disagree. The fact that Boulder went to an Appeals Conference first is problematic, hence my belief that this might not work. But that is not to say Boulder can't try it. As noted, he could indeed give the IRS a hard time about this matter, essentially forcing the IRS to shut the door on his client, and maybe they'll budge with such a small liability at play.

This is area of the law, is quite frankly, pretty interesting and technical...about prior opportunities to dispute, issues previously raised and considered, etc.

I threw out the ETA offer idea because I do wonder if that might change things. By filing such an offer within the context of the CDP Hearing, as a collection alternative, I wonder if it could be an end around to the issue Dave cites.

DaveFogel (talk|edits) said:

4 April 2014
I think it’s pretty well settled that having the opportunity to appeal such a penalty, either before or after assessment, does constitute a prior opportunity to dispute the liability. See Treas. Reg. §§301.6320-1(e)(3) (Q&A-E2) and 301.6330-1(e)(3) (Q&A-E2); Bailey v. Commissioner, T.C. Memo. 2005-241; Pelliccio v. United States, 253 F.Supp.2d 258 (D. Conn. 2003).

There’s a case on point. In Lewis v. Commissioner, 128 T.C. 48 (2007), the Tax Court held that a prior opportunity to dispute the liability includes a prior conference conducted with Appeals, even where a taxpayer has no right to judicial review of the prior Appeals determination. The Court held that the taxpayer was not permitted to contest his liability in the CDP hearing and in the Tax Court because he had previously contested the same liability in a hearing before Appeals, seeking abatement of late filing and late payment penalties. In the process of reaching this decision, the court upheld the validity of the CDP regulations as a reasonable interpretation of IRC §6330(c)(2)(B).

Ckenefick (talk|edits) said:

4 April 2014
Again, I can't say that I disagree. From Ramdas, which is a very recent case:

In his request for a CDP hearing, Mr. Ramdas stated that “taxpayer requests penalty abatement as he believes he has reasonable cause for abatement of penalties.” We construe this as a challenge to underlying liability for the penalty, which we will address below.

Of course, Boulder could argue for a different construction, but I don't think it would help in his case, because he didn't go to CDP first. In other words, if Boulder argues that his challenge in the initial Appeal Conference should not be construed as a challenge to the underlying liability, then the IRS might say, "Doesn't matter. Even if we agree with you, you went to Appeals first, so the issue you are now raising in your CDP Hearing was already been raised and considered the first time around."

But I still think the type of offer put forth as a collection alternative might matter. If you file a DATL offer, as a collection alternative in a CDP setting, I see the prior opportunity issue coming back into play to put a kibash on the attempt. But with an ETA offer, I'm not totally convinced...

Ckenefick (talk|edits) said:

5 April 2014
http://www.procedurallytaxing.com/author/guest/

I haven't (fully) read this piece yet, the one about the Lewis case Dave references above. Basically, the author says the court got it all wrong in Lewis. I mentioned above that this is a very, very technical area of the law. Article was written by Lavar Taylor, who knows more than quite a bit about procedure. He was kind enough to take my call one time on a case...

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