Can You Get Penalty Abatement If Your Accountant Dies?

What if you give your tax documents to your CPA and your CPA dies before preparing your return?

I am reading a case where that happened.

I will lead with this: the IRS assessed almost $41,000 in penalties.

The Willetts had a longstanding relationship with their CPA (Goode). In August, 2015 they gave her all the tax documents to prepare their 2014 tax return.

Time passed and the Willetts attempted to reach Goode, but without success. In October, she finally responded, explaining she had been ill and in a nursing home. She would cover any penalties and interest associated with their return.

In November, 2015 (mind you, the return was due October 15) Mrs Willett visited Goode at her home. Ms Goode assured her she would bounce back and finish their return.

That was the last time the Willetts spoke with Goode, who passed away in February, 2017.

The Willetts had some foreboding, however, as they contacted other CPA firms to address their 2014 return. There were obstacles – Goode had original documents, for example – but they were trying. The Willetts were told that the firms were already too busy with individual returns or that their return was too complex.

COMMENT: Folks, that sounds odd to this practitioner. Methinks there is more to the story.

They finally found and hired a CPA in June, 2016. They filed their 2014 return in September, 2016 – eleven months late.

You already know the IRS came back hot with penalties and interest.

The Willetts took the case to a District Court in California.

COMMENT: That means that they had to pay the penalties and then litigate for a refund. Had they gone to Tax Court, they would not have had to pay the penalties and interest before bringing suit. That would be the upside. The downside to the Tax Court is that the judges are tax specialists. It is a little harder to spin a tale to a specialist, as opposed to a district judge who is a generalist and hears a spectrum of cases.

Penalties can be abated for reasonable cause, but there is a case out there – Boyle – that greatly circumscribes a taxpayer’s ability to rely on an accountant in order to abate penalties. The Boyle decision (sort of) divided tax practice into two categories for purpose of penalty abatement:

(1) The first category is “routine” compliance, such as looking up when a tax return is due and making sure it gets filed by then.

(2) The second category includes professional advice, such as whether a Code section affects a taxpayer or what certain provisions from the 2017 Tax Cut and Jobs Act even mean.

The Boyle court acknowledged that one could rely on an accountant for column two issues, but one probably could not rely for purposes of column one.  The IRS has subsequently interpreted Boyle aggressively, arguing that the qualifier “probably” is not even required in the preceding sentence.

So how does Boyle work when your CPA dies? Is it more like column one or more like column two?

The Court discussed issues surrounding taxpayer reliance on an agent, but at heart the Court was looking at someone who relied on an accountant – apparently a sole practitioner – who was quite ill, in and out of nursing facilities and incapable of producing timely work.

Question: what would a reasonable person do?

After all, the concept is reasonable cause.

The Court was not at all persuaded that reasonable people would wait endlessly for their accountant to recover from a nursing home stay before preparing their return. A reasonable person would seek-out another accountant – even if it was a one-off engagement - in order to meet their tax responsibilities.

There was no reasonable cause.

I admire the Willetts’ loyalty to their practitioner, but their delay cost them $41 grand.

Corporation Still Owed Penalties Even After Its Officers Died

I had a conversation this week with another practitioner.

He has an elderly client who is having memory issues. This client in turn is represented by another person – an agent. The agent refuses to sign or provide consent to the filing of the elderly client’s tax return.

My first thought was that there must be odd stuff on the client’s return, but I am assured that is not the case. The agent is – how to say this delicately – not a likeable person.

The practitioner asked me what I would do.

The issue is that a tax return is confidential information. We – as CPAs – are not allowed to release a return, even to the IRS, without permission from the client. The IRS requests that this permission be in writing, which is why you sign a form and return it to your preparer before he/she electronically files your return.

Theory is easy. Life is messy.

Let’s segue by looking at a penalty case.

The taxpayer was protesting $58 thousand in penalties.

Turns out the taxpayer was an S corporation. This type of corporation (normally) does not pay tax. Rather it divides up its income among its shareholders (on Form K-1, to be specific), who in turn include those numbers on their individual tax returns.

For years 2011 through 2013 the company did not file returns with the IRS.

Yep, that is going to hurt.

But it did issue K-1s to its shareholders, so (supposedly) all taxes were timely and correctly paid to the Treasury.

Seems odd. Why would the company issue K-1s but not file the return itself with the IRS?

Turns out that there were a number of related family companies – 19 of them, in fact. The patriarch of the family (Victor) hired a CPA (Tapling) to function as CFO for all his companies.

Victor was diagnosed with and treated for cancer. He died December 30, 2013.

We are talking about penalties for years 2011 through 2013, so I suspect that Victor’s illness is involved.

In 2010 Tapling himself was diagnosed with cancer. He eventually died from complications in 2016.

Tapling prepared and distributed the K-1s for years 2011 through 2013 but did not however send the returns to the IRS. Why? Perhaps he was waiting for the passing of authority within the family. Perhaps he did not consider it within his corporate authority to actually sign the returns. Maybe the transition involved family members who wanted Tapling gone, and he did not want to provide easy reasons for his dismissal.    

The IRS came in hot.

It led with the Boyle decision (of which we have spoken before), arguing that the corporation was more than Victor or Tapling. It had a Board of Directors, for example, and the Board could have – should have – stepped in to be sure that returns were being filed.

The company argued that Boyle involved an agent. This situation involved corporate officers and not agents. Its officers were gravely ill and did not timely discharge their responsibilities, much to the company’s detriment.

I see both sides.

To me, the IRS and the company should compromise. Perhaps the IRS could abate 50% of the penalty, and the company would hold its nose and write a check. Both sides could acknowledge that the other side had valid points. Life is messy.

Not a chance:

Consequently the court grants defendant’s motion for summary judgement and denies plaintiff’s motion for summary judgement.”

The IRS won it all.

Our case this time for the home gamers is Hunter Maintenance & Leasing Corp., Inc.v United States.

Business League: A Different Type Of Tax-Exempt

You may have heard about business leagues.

One very much in the news recently is the National Football League, which has been considering giving up its tax-exempt status.

In the tax world, exempt entities obtain their exempt status under Section 501(c). There is then a number, and that number is the “type” of exempt under discussion. For example, a classic charity like the March of Dimes would be a 501(c)(3). When we think of tax-exempts, we likely are thinking of (c)(3)’s, for which contributions are deductible to the donor and nontaxable to the recipient charity.

The (c)(3) is about as good as it gets.

A business league is a (c)(6). So is a trade association.

Right off the bat, payments to a (c)(6) are not deductible as contributions. They are, however, deductible as a business expense- which makes sense as they are business leagues. You and I probably could not deduct them, but then again you and I are not businesses.

There are some benefits. For example, a (c)(6) has virtually no limit on its lobbying authority, other than having to pro-rate the member dues between that portion which represents lobbying (and not deductible by anybody) and the balance (deductible as a business expense).

There are requirements to a (c)(6):

(1)  There must be members.

a.     The members must share a common business interest.

                                                              i.     Members can be individuals or businesses.

                                                            ii.     If membership is available to all, this requirement has not been met. This makes sense when you consider that the intent of the (c)(6) is to promote shared interests.

(2)  Activities must be directed to improving business conditions in a line of business.

a.     Think of it as semi-civic: to advance the general welfare by promoting a line of business rather than just the individual companies.

b.    This pretty much means that membership must include competitors.

c.     Sometimes it can be sketchy to judge. For example, the IRS denied exemption to an organization whose principal activity was publishing and distributing a directory of member names, addresses and phone numbers to businesses likely to require their services. The IRS felt this went too close to advertising and too far from the improvement of general business conditions.

(3)  The primary activities must be geared to group and not individual interests.

a.     The American Automobile Association, for example, had its application denied as it was primarily engaged in rendering services to members and not improving a line of business.

(4)  The main purpose cannot be to run a for-profit business.

a.     This requirement is standard in the not-for-profit world. You can run a coffee shop, but you cannot be Starbucks.

b.    For example, a Board of Realtors normally segregates its MLS activities in another – and separate – company. The Board itself would be a (c)(6), but the MLS is safely tucked away in a for-profit entity – less it blow-up the (c)(6).

(5)  Must be not-for-profit.

a.     Meaning no dividends to shareholders or distributions rights if the entity ever liquidates.

b.    BTW – and to clarify – a not-for-profit can show a profit. Hypothetically it could show a profit every year, although it is debatable whether it could rock the profit level of Apple or Facebook and keep its exemption. The idea here is that profits – if any – do not “belong” to shareholders or investors.

(6)  There must be no private inurement or private benefit to key players or a restricted group of individuals.

a.     Again, this requirement is standard in the not-for-profit world.

b.    This issue has been levelled against the NFL. Roger Goodell (the NFL Commissioner) has been paid over $44 million a year for his services. It does not require a PhD in linguistics to ask at what point this compensation level becomes an “inurement” or “benefit” disallowed to a (c)(6).

There is litigation around (4) and (6). The courts have allowed some business activity and some benefit to the members, as long as it doesn’t get out of hand. The courts refer to this as “incidental benefit.”

Which can lead to interesting follow-up issues. Take a case where the organization runs a business (within acceptable limits) and then uses the profit to subsidize something for its members. Can this amount to private inurement? The members are – after all - receiving something at a lower cost than nonmembers.

Let’s take a look at a recent application. I think you know enough now to anticipate how the IRS decided.

(1)  The (c)(6) members are convenience stores and franchisees of “X.”

(2)  Revenues will be exclusively from member fees.

(3)  One-quarter of member fees will be remitted annually to the national franchisee (that is, the franchise above “X”)

(4)  Member franchisees will elect the Board.

(5)  The (c)(6) will educate and assist with franchise policies.

(6)  The (c)(6) will facilitate resolution between members and executives of “X.”

How did it go?

The IRS bounced the application.

Why?

We could have stopped at (1). There is no “line of business” happening here. Members are limited to franchisees of “X.” Granted, “X” participates in an industry but “X” does not comprise an industry. 

The organization tried to clean-up its application after being rejected but it was too little too late.

The organization was not promoting the industry as a whole. It rather was promoting the interest of the franchisee-owners. 

Nothing wrong with that. You just cannot get a tax exemption for it.

White House Says No To Death Star

Have you been or seen the White House website? Did you know that you can post a petition there? Here is the website:

The right to petition your government is guaranteed by the First Amendment of the United States Constitution. We the People provides a new way to petition the Obama Administration to take action on a range of important issues facing our country. We created We the People because we want to hear from you. If a petition gets enough support, White House staff will review it, ensure it’s sent to the appropriate policy experts, and issue an official response.

The following was actually posted:

We petition the Obama administration to:

Secure resources and funding, and begin construction of a Death Star by 2016.

Those who sign here petition the United States government to secure funding and resources, and begin construction on a Death Star by 2016.

By focusing our defense resources into a space-superiority platform and weapon system such as a Death Star, the government can spur job creation in the fields of construction, engineering, space exploration, and more, and strengthen our national defense.

The petition received over 34,000 signatures, prompting the White House to post the following:

The Administration shares your desire for job creation and a strong national defense, but a Death Star isn't on the horizon. Here are a few reasons:

• The construction of the Death Star has been estimated to cost more than $850,000,000,000,000,000. We're working hard to reduce the deficit, not expand it.
• The Administration does not support blowing up planets.
• Why would we spend countless taxpayer dollars on a Death Star with a fundamental flaw that can be exploited by a one-man starship?

Even though the United States doesn't have anything that can do the Kessel Run in less than 12 parsecs, we've got two spacecraft leaving the Solar System and we're building a probe that will fly to the exterior layers of the Sun. We are discovering hundreds of new planets in other star systems and building a much more powerful successor to the Hubble Space Telescope that will see back to the early days of the universe. 

If you do pursue a career in a science, technology, engineering or math-related field, the Force will be with us! Remember, the Death Star's power to destroy a planet, or even a whole star system, is insignificant next to the power of the Force.

COMMENT: OK, technically this is not tax - but it is funny.

IRS Extends Key Deadline for 2010 Estates

On September 13, 2011 the IRS announced that estates of 2010 decedents will have until next year to file certain tax forms and pay the related taxes. In addition, the IRS is also providing relief for beneficiaries of those estates.

The timing was critical, as 2010 estate tax returns for decedents dying on or before 12/16/2010 were due Monday, September 19, 2011. Estate tax returns are normally due nine months after death, but there was an exception because of last year’s tax law flux.

Remember there was no estate tax for most of 2010. On December 17, 2010, the President signed a tax bill that reinstated the estate tax retroactively to January 1, 2010. That law set a 35% estate tax rate and provided an estate tax exemption of $5 million. The advantage to this scheme is that estate assets get “stepped-up” to their fair market value at the date of death. This means that the inheritors can (generally) sell the assets right away without incurring any income tax. To complicate matters, the bill also made this scheme an option for 2010. Estates of 2010 decedents could opt out of the new tax and use a modified basis carryover regime. There would be no estate tax, but the heirs received the same basis in assets as the decedent (with a $3 million exception for the surviving spouse and a $1.3 million exception for non-spousal beneficiaries). This opt-out required the beneficiaries to know the carryover basis in the assets inherited, so the IRS created a new form (Form 8939 - Allocation of Increase in Basis for Property Acquired From a Decedent). Opting-out of the estate tax is an irrevocable election.

As I write this, the IRS has not finalized Form 8939, although a draft version is available.

The IRS is providing the following filing relief:

·    If the estate is opting out of the new estate tax regime (that is, an estate of $5 million or more) it will have until January 17, 2012, to file Form 8939. This form was previously due November 15, 2011. The new due date will apply automatically; the estate does not need to file any anything.

·    Estates between 1/1/2010 and 12/16/2010 that request an extension to file their estate tax returns and pay any estate tax due will have until March 19, 2012, to file. The IRS will not assess penalties for either late filing or late payment.  Interest will be due on any estate tax paid after the original due date.

·    Estates between 12/17/10 and 12/31/10 will be due 15 months after the date of death. The IRS will not assess penalties for either late filing or late payment.  Interest will be due on any estate tax paid after the original due date.

·    The IRS is providing penalty relief to beneficiaries who received property from a 2010 decedent and also sold the property in 2010. The taxpayer should write “IRS Notice 2011-76” on the amended return to identify the issue to the IRS.

Confused? It is easy to be.  Some thoughts:

(1)   Seems to me that an estate under $5 million would generally elect-out, especially if the appreciation in estate assets is less than $1.3 million. In that event, we don’t even need the spousal $3 million to protect all the step-up.

a.   Remember that there are assets that do not receive a step-up. These are sometimes referred to as IRD (income in respect of a decedent) assets. The most common – by far – are 401(k) s and IRAs.

(2)   Estates over $5 million are a tougher call.

a.   Even then, it depends on the mix of assets. If the majority of assets are IRD assets, the step-up may be modest, as IRD assets do not step-up. That would incline one to the carryover regime.

b.   We are now balancing the estate tax with looming income taxes when the beneficiaries sell the assets.  If there is modest appreciation, then the carryover regime would appeal. If there is substantial appreciation, then the new tax regime would appeal – maybe.

                                          i.    Why maybe? Because it depends on the tax rate. If the assets would generate capital gains, an Ohio beneficiary would face an approximate 21% income tax rate (15% federal plus 6% Ohio). Why would one pay 35% when one could pay 21%?

c.   Frankly, I am not sure how one could determine the best course of action without assembling the fair market values and basis for all estate assets and considering the intentions of the beneficiaries. If the beneficiary intends to sell the asset right away, then one could incline to a different decision than if the beneficiary intends to retain the asset forever.

d.   There is an issue in the carryover regime that concerns tax practitioners. How do you determine the basis of an asset that has been owned forever and for which cost records do not exist? This is not a small matter, as the default IRS response is to say that the asset has a basis of zero. If this fact pattern is a significant for the estate, then one would be inclined to the new tax regime as the assets would step-up to fair market value on the date of death.