Ask The California Employment Tax And Payroll Tax Attorney – Will Depression Constitute Reasonable Cause For Abating Late Penalties? – The Williams/matiz Case

By Robert S. Schriebman

2022

Introduction

Williams and Matiz are husband and wife. Their case involves the late filing of their 2018 joint personal income tax return with the State of California. (A.Williams and G.Matiz, OTA Case No. 21057713, 2022-OTA-335)

The Facts

In 2018, Mr. Williams was diagnosed with major depressive disorder (MDD). He was prescribed anti-depressants. He failed to file a timely California income tax return. The FTB received information that he received sufficient income to require the filing of a return. The FTB sent him a Demand for Tax Return. In September 2020, Williams and Matiz filed their late return and offered an explanation as to why the return was late. Williams and Matiz had an FTB tax liability of over $376,000. They were assessed a late filing penalty and an underpayment of estimated taxes totaling of over $130,000. All in all, they owed the FTB over $475,000. They paid the deficiency and filed an FTB Claim for Refund for over $87,000. The FTB rejected the claim, and the couple filed an administrative appeal to the Office of Tax Appeals (OTA).

The OTA’s Ruling

Williams and Matiz argued that the refund should be granted due to reasonable cause – diagnosed depression. The only evidence they provided was a medical letter which stated with no further detail that Mr. Williams had been in treatment for MDD and has been on anti-depressants since 2018. No further evidence was offered to prove that his mental illness was so severe that it continually prevented Williams from filing his 2018 return timely in April 2019.

R&TC § 19131 imposes a late penalty where taxpayers fail to timely file returns when due. The penalty may be removed or abated if the taxpayer can show reasonable cause and not willful neglect. Reasonable cause has traditionally been defined as the exercise of ordinary business care and prudence, or that cause existed as would prompt an ordinarily intelligent and prudent businessperson to have so acted under similar circumstances. (Appeal of Auburn Old Town Gallery, LLC, 2019-OTA-319P. Mental illness or mental incapacity can constitute reasonable cause for the failure to timely file tax returns. The metal disability must exist at the time the tax return was required to be filed (April 2019). Because the taxpayers were married, the OTA inquired as to whether Matiz, the wife, could have taken the necessary steps to file the return on her own. Matiz argued that she was a Canadian citizen and did not know the California requirements. This would have been reasonable cause to excuse her except the OTA had evidence from the FTB that she and her husband had filed several joint returns prior to 2018. Matiz’s excuse held no water.

The medical letter offered into evidence did not help because there were no statements regarding Williams’ mental health at the time the return was due. In other words, the letter was an incomplete explanation.

The OTA ruled that Williams and Matiz did not present a good case for penalty abatement. They were represented by counsel. It is interesting that the extra step to present more evidence other than the vague letter were not taken.

Conclusion

Williams tried to show the OTA that he truly suffered a great hardship caused by his depression. He changed medications several times until he found the one that worked for him. Due to his depression, he lost his job in April 2019 as a result of the MDD. While the OTA was sympathetic, it needed direct and clear evidence that Williams and Matiz were so negatively impacted by the MDD that trying to file a timely return in April 2019 was objectively impossible. They did not meet this burden of proof.

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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 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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