ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WHEN DOES RELIANCE ON YOUR ACCOUNTANT CONSTITUTE REASONABLE CAUSE FOR THE ABATEMENT OF PENALTIES?
By Robert S. Schriebman
In most cases, reasonable cause constitutes valid grounds for removing or abating most penalties asserted by the IRS, FTB, and EDD. The State of California relies upon the standards set forth in the Internal Revenue Manual (IRM), Chapter 20. The usual grounds for abatement of penalty are death, illness, or unavoidable absence, as well as fire, casualty, or natural disaster. Another ground for abatement, that is not well known or understood, is “reliance by the taxpayer on the advice of a competent tax advisor.” In 1985 the US Supreme Court decided the Boyle case (Boyle v. US, 469, US 241). In Boyle, the Court made a distinction between reliance on procedural matters vs. reliance on substantive matters of tax law. The California Office of Tax Appeals (OTA) had the opportunity to interpret the Boyle decision in the recent case of Almark Properties, LLC (2022-OTA-126).
This article will discuss the Almark Properties, LLC (Almark) case in light of the Supreme Court’s Boyle decision.
The Universal Standard for Penalty Abatement
The abatement of late filing and late payment penalties is based upon the standard of reasonable cause (R&TC § 19172(a), IRM Chapter 20). Reasonable cause exists when the taxpayer can show that he/she acted as an ordinarily intelligent and prudent businessperson would have acted under similar circumstances. One need not be Superman or Wonder Woman.
The Almark Properties, LLC Case
Almark is an LLC taxed as a partnership and organized in California in March 2015. The LLC had a habit of filing its annual income tax returns late. Its 2015 and 2017 returns were filed in early 2020. The late filings generated late filing and late payment penalties. Almark brought its case before the OTA arguing that its late filings were due to erroneous advice from its tax advisor. The OTA did not buy the argument and cited the Boyle case for its refusal to abate the penalties. Almark offered no concrete evidence of its tax advisors actions or advice.
The Supreme Court in Boyle noted that one does not need to be a tax expert to know that tax returns have fixed filing dates and taxes must be paid when due. Reliance on a tax professional’s advice for questions of substantive tax law, such as whether a liability exists or whether it is necessary to file a return, may constitute reasonable cause under limited conditions. On the other hand, reliance on an expert cannot function as substitute for compliance with an unambiguous statute. Furthermore, the tax preparer must not only be competent in tax law in general but must specifically be competent in California tax law.
Everybody knows that tax returns have specific filing deadlines. This is not something requiring expertise knowledge. Almark failed to assert or establish that its tax advisor was competent in California tax law or that it provided its tax preparer with a full disclosure of the relevant facts and documents. Without this information, the OTA was unable to determine whether Almark exercised the standard of ordinary business care and prudence such that an ordinary intelligent and prudent businessperson would have acted similarly under the same circumstances. The OTA complimented Almark for filing its returns and paying its taxes as soon as it was aware of the error. However, this does not constitute reasonable cause for Almark’s failure to timely file its returns and pay its taxes. The OTA refused to abate either the late filing or late payment penalties.
Government officials who audit tax returns and taxpayers, whether they are from the IRS, FTB or EDD, are very familiar with the taxpayer’s excuse of blaming the accountant or tax return preparer. Judges are just as aware. As soon as a taxpayer points the finger of blame at the accountant, a red flag goes up in the auditor’s mind or judge’s mind and a negative first impression is created, and the taxpayer’s credibility is called into question. That blame excuse is a lame excuse and carries no positive weight without supporting documentation.
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 50 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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