ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WILL COVID-19 RELATED PROBLEMS CONSTITUTE REASONABLE CAUSE FOR PENALTY ABATEMENT?
By Robert S. Schriebman
Since 2020 the Covid pandemic has caused much grief, aggravation, and inconvenience. Virtually everyone of us has been negatively impacted in some way. Many of these problems have caused business-related headaches, especially staff shortages and record keeping delays. For some it has caused the late filing of EDD, IRS and FTB tax returns. May late filing penalties be abated based upon pandemic-related issues?
On January 5, 2023, the Office of Tax Appeals (OTA) issued its decision in The Matter of the Appeal of Deash, LLC, (OTA Case No. 22029716). Dr. Deash filed his 2019 California S-Corporation return late and argued that any late filing penalties should be abated due to the pressure put on him by the pandemic. Let’s take a look at this case.
The Deash Case
Deash, LLC was taxed as an S-Corporation for the 2019 tax year. The original filing date of the return was July 15, 2020. While Deash timely filed its 2019 IRS return, the FTB return was not filed until July 6, 2021. The FTB assessed two penalties against the LLC. The first penalty was the late filing penalty of $200, and the second penalty was a personal shareholder late filing penalty of $432. The LLC paid both penalties and filed a claim for refund. The reasons set forth for penalty abatement centered around the pandemic and the pressure put upon Dr. Deash to tend to his sick patients and to cope with staff shortages and delays. Deash also argued that his accountant was also impacted by staff shortages and delays in gathering necessary records to complete and file the FTB tax return
The OTA Decision
California imposes a penalty for the failure to file a return by its due date, unless the failure to file was due to reasonable cause and not due to willful neglect. (R&TC, § 19131.) When the FTB assesses a late filing penalty, it is presumed to have been correctly imposed, and the burden of proof is on the taxpayer to show that reasonable cause exists to abate the penalty. (See Appeal of Xie, 2018-OTA-076P.)
The FTB has a per-shareholder S-Corporation late filing penalty under ER&TC § 19172.5 that is computed at $18 per shareholder per month for 12 months. Deash LLC had two shareholders during the 2019 tax year and filed its return about one y ear too late. The FTB charged a penalty of $432.
To establish reasonable cause, you have to show that the failure to timely file returns occurred despite the exercise of ordinary business care and prudence. Generally, one’s reliance on an accountant to file a return or to make a timely tax payment, is not reasonable cause. Furthermore, unsupported assertions do not satisfy the taxpayer’s burden of proof.
Here, Dr. Deash blamed the pandemic for causing staff shortages and delays in gathering up the necessary records to complete his 2019 FTB return. He also argued that he was so busy taking care of sick patients, that his tax compliance took second place. However, he did not provide any documentation or other evidence to support his contentions. He did not show that he exercised ordinary business care and prudence. Dr. Deash also blamed his accountant for not timely filing the LLC return due to staff shortages and documentation gathering issues at the accountant’s office. His arguments were not convincing. A taxpayer cannot delegate to his/her accountant the duty to meet the tax-filing deadline.
Accordingly, Dr. Deash did not meet his burden of proof to abate either the late filing penalty or the penalty against S-Corporation shareholders.
Most penalties assessed by the EDD, FTB and IRS may be abated for reasonable cause. Reasonable cause means that a failure occurred despite the exercise of ordinary business care and prudence. The laws do not require one to make a super-human effort at compliance. The best way to abate a penalty is to present objective paper evidence of good faith compliance. Like the Deash case, unsupported excuses are not going to win the day.
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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