Let’s travel to the Bay State for a
taxpayer requesting reasonable cause against the imposition of penalties.
The amount in dispute is $100.
Yes, you read that correctly.
Our protagonist is Jonathan Haar, and
he lives in Massachusetts. On April 15, 2011 he had the audacity to file a
paper extension and include a $19,517 check for his tax year 2010 state return.
The paper extension and payment
“… did not comply with the requirements set forth in Technical
Information Release (“TIR”) 04-30 (“TIR 04-30”), which states that if a payment
accompanying an extension application equals $5,000 or more, such extension
application and payment must be submitted electronically.”
Got it. The state says that it is less
expensive to process electronic than paper tax filings and payments. Seems reasonable.
How do we get people to follow along, however? One way is to make whatever the
state wants mandatory.
Our protagonist unfortunately had
travelled this path before, and he had been warned for tax year 2005 and
penalized for year 2006. Massachusetts
had a tax recidivist! They assessed the above-mentioned $100 penalty on our
ne-er-do-well.
If you were my client, I would have
told you to pay the $100 and move on. Mr. Haar is not my client, and he refused
to pay. He instead filed an appeal, which appeal went to the Massachusetts
Appellate Tax Board.
His argument?
“Mr. Haar maintained that the Commissioner’s electronic
payment mandate is a ‘serious invasion of both [his] privacy and [his] personal
business practices,’ as it exposes his finances to risk of cyber attack.”
“I intentionally do no
electronic banking nor direct bill paying, I have none of my credit cards
linked to my bank accounts directly and I think anyone who does any of the
above is exposing themselves to multiple risks of cybercrime and identity
theft.”
Mr. Haar further expressed doubts as
to the security of the computer systems used by the Department of Revenue
(“DOR”), noting that "if the Pentagon can be hacked," he had little confidence
that DOR could protect his – or anyone’s – personal data from theft.
Massachusetts argued that it had the
authority to mandate electronic filing and payment, as well as assess penalties
if a taxpayer failed to comply with their filing and payment mandates. Massachusetts
does recognize exceptions for reasonable cause, but its own Administrative
Procedure 633 (“AP 633”) provides that
… the fact that a taxpayer does not own a computer or is
uncomfortable with electronic data or funds transfer will not support a claim
for reasonable cause.”
COMMENT: Call me quaint, but I would say that someone not
having a computer is prima facie reasonable cause for not being able to file an
electronic return or transfer funds electronically. The issue I see with AP 633
is its absolutism: the language “will not support” leaves no room. Why not say
instead “generally will not support,” if only to allow space for unexpected
fact patterns?
In support of its position, the DOR
trotted out two officials: the first was Robert Allard, a tax auditor. He pointed out that Mr.
Haar filed an electronic return, presumably through a professional preparer. I
suppose that Mr. Allard felt that if one could electronically file then one
should be able to electronically pay.
The second was Theresa O’Brien-Horan, a 26-year employee and Deputy Commissioner, who testified that
… the mandate at issue in this appeal – requiring individual
taxpayers who apply for an extension with an accompanying payment of $5,000 or
more to file and pay electronically – is helpful to DOR because it maximized
up-front revenue intake.”
… the $5,000 threshold was chosen because it would ‘impact
17% of the taxpayers, but … get the money banked for 84% of the revenue.”
You can virtually feel the customer service vapor emanating
from Ms O’Brien- Horan.
When asked whether reasonable cause was
the Massachusetts equivalent of an ”opt out,” Ms. O’Brien-Horan answered “yes.”
OBSERVATION: The IRS, for example, prefers that one file an
electronic return. The IRS however did not put the burden on the taxpayer;
rather it put the burden on the preparer. If a preparer prepares more than a
minimal number of returns annually, the preparer is required to file the
returns electronically. This is awkward, as the return belongs to the taxpayer
and not to the preparer. The preparer is not allowed to release any return –
even to the IRS – without the taxpayer’s approval. What does the preparer do if
the taxpayer does not grant approval? The preparer includes yet-another-form
with the return indicating that the taxpayer has “opted out.” This prevents the
IRS from penalizing the preparer for not filing electronically.
If Mr. Haar’s position was reasonable, then Mr. Haar could “opt
out,” irrespective of any self-serving Massachusetts Administrative Procedure.
Ms. O’Brien-Horan just didn’t think
that Mr. Haar was being reasonable.
But the Board did.
“Given his reference to the hacking of the Pentagon’s computer
system, and in light of the many well-publicized instances of large-scale
thefts of financial information following computer breaches at businesses and
other institutions, and the appellant’s consistent practice of avoiding
electronic payment of all his bills, including his tax obligations, the Board
found that the appellant’s failure to utilize the Commissioner’s mandated
electronic tax payment to be reasonable.”
Two things strike me immediately.
The first is the cause for concern
comprising Mr. Haar’s argument. It had not occurred to me to off-grid all of
one’s banking transactions, but he gives one pause. I recently read the
following on www.marketwatch.com, for example:
A Russian
gang has stolen 1.2 billion user names and their passwords as well as more than
500 million email addresses, the New York Times reports.
The information came from more than 400,000 websites, according to the Times, which says researchers at Milwaukee-based Hold Security discovered the cyber heist.
Mr. Haar is highly cautious. His
position is somewhat eccentric but not unfounded. A reasonable tax collection agency
would have granted him this one and moved on.
The second is the inanity of Massachusetts
DOR. Rather than abate a $100 penalty, it preferred to pursue the matter, at
who knows what cost to state and citizens. We know that cost would include Mr.
Allard and Ms O’Brien-Horan’s payroll, not to mention that of their superiors,
legal counsel and who-knows-what else. I can understand not wanting to set a
precedent, but … really? My take is that the DOR is too well-funded if they
have the time and money to pursue nonsense like this. Perhaps DOR budgets
cutbacks are in order for Massachusetts.
