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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – ABATING LATE FILING PENALTIES – WHAT IS REASONABLE CAUSE? – PART 1

By Robert S. Schriebman

2019

Introduction

This is Part 1 of a 2-Part series that will discuss the recent case of Peng v. US. This case was decided in the US Court of Federal Claims in October 2018. The case is instructive because it demonstrates what NOT to do when seeking to convince the IRS to remove or abate late filing penalties. See Shih-Fu Peng and Roisin Heneghan v. U.S. Court of Federal Claims, 16-1263 T, October 24, 2018.

These two articles will discuss the facts in Peng and the Court's analysis of the Doctrine of Reasonable Cause in light of the US Supreme Court decision in United States v. Boyle 469 U.S. 241, 245 (1985). The Boyle case is instructive because it defines "reasonable cause."

The Peng/Heneghan Case

Peng and Heneghan were husband and wife. They resided in Ireland in 2012. Because they resided outside of the US they were given an additional two months to file their 1040 return. So instead of the due date being April 15, 2013, the due date was June 15, 2013. They could have applied for an additional extension until October 15, 2013. However, on November 1, 2013 Mr. Peng contacted his US tax return preparer and stated "...I completely forgot this year because you usually remind me of US taxes! How late am I? What do you want or need for which tax?" The Peng/Heneghan 2012 return was filed on July 17, 2014. Penalties were assessed and paid. But, Peng filed a claim for refund of the penalties and interest in the amount of $17,000. When the IRS turned down the refund claim, Peng brought a refund suit in the U.S. Court of Federal Claims in Washington, DC.

What were Peng's ground for reasonable cause to abate the penalties and obtain a refund? Mr. Peng sought to excuse his delinquency for the following reasons:

  • Mr. Peng's father died in July 2012.
  • Mrs. Peng (Heneghan) gave birth to a child in January 2013.
  • Mr. Peng's grandmother died in October 2013.
  • Mr. Peng claimed that his accountant was unresponsive to his inquires.

The Court ruled that none of Mr. Peng's reasons constituted valid grounds for a refund of penalties and interest thereon. Let's look at the Court's reasoning and its very instructive language that will help us navigate a course that will result in a successful abatement appeal.

Why Mr. Peng's Excuses Failed

Mr. Peng was assessed a late filing penalty under IRC § 6651(a). There is also daily compounding interest assessed. Under the terms of this code section, penalties, and interest on penalties, are excused only if "such failure is due to reasonable cause and not due to willful neglect. (See 26 U.S.C. 6651 (a) (1)-(2). In the Supreme Court's Boyle case, the Court stated the following: "[t]o escape the penalty, the taxpayer bears the heavy burden of proving both (1) that the failure did not result from 'willful neglect,' and (2) that the failure was 'due to reasonable cause." Boyle, 469 U.S. at 245. In other words, one seeking the removal of late filing and late payment penalties must show (1) reasonable cause, and (2) absence of willful neglect.

The Court of Federal Claims found that the four excuses offered by Mr. Peng were not sufficient hardships to prevent him from timely filing. Recall that Mr. Peng first notified his accountant in November 2013, at least two weeks after the second extension deadline of October 15, 2013.

While it was not stated in the case, and reading between the lines, the Courts and the IRS do not give much, if any, credence to the taxpayer's usual fall-back excuse of blaming his/her accountant. This is the last thing you should do if you are seeking penalty relief.

First Time Abatement Relief

In reading the Peng case I was surprised that Peng/Heneghan apparently failed to seek relief from the IRS under the First Time Abatement Rule. The purpose of this rule is to remove a late filing or late payment penalty for first time failures. The rules found in Chapter 20 of the Internal Revenue Manual. Actually, this rule is broader and can apply to anyone seeking relief if they have a clean filing record for the past three years. There was no reference in the Peng case seeking this relief. Perhaps if Peng used this relief rule, he could have been successful in removing $17,000 of penalties and interest and avoiding the cost and delays of refund litigation.

Conclusion

In Part 2 we will take a closer look at the Boyle case as well as discuss lower court cases interpreting Boyle. We will also consult the IRS Manual for guidance. We will see that the standard for reasonable cause is incapacity or trauma so severe that a taxpayer is unable to attend to his/her personal affairs.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the Federal and State governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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