by Diane L. Mutolo, J.D., LL.M. *
A fiduciary can be liable for penalties for failure to file a decedent's or estate's tax return and failure to pay the taxes...
Under IRC Section 6501, the three-year statute of limitations on the assessment of tax deficiencies does not begin to run until a return is filed. Under IRC Section 6901, a fiduciary is personally liable for payment of the trust's or estate's income tax, as well as all penalties imposed for failure to file a return or pay the tax. Even if no tax is due on the fiduciary income tax return, there is still a penalty for failure to file the return.
IRC Section 6651(a).Under IRC Section 6651(a), the civil penalty for failure to file, unless it is shown that the failure is due to reasonable cause, is the imposition of an addition to the tax in the amount of 5 percent of the amount of tax required to be shown on the return, provided the delinquency is for not more than one month. For each additional month or part of a month that the delinquency continues, an additional 5-percent penalty is imposed, although the penalty may not exceed 25 percent in the aggregate. Under IRC Section 6651(f),
if any failure to file is fraudulent, the penalty is raised to 15 percent per month or portion of a month that the return is not filed, with a maximum penalty of 75 percent. The period of delinquency runs from the day after the due date of the return (including extensions) until the return is actually received by the Service.
When both the failure to file penalty and the failure to pay penalty apply, each penalty is subject to its own 25-percent ceiling. [Smith v. United States, 571 F. Supp. 664 (S.D.N.Y. 1983); Gerdes v. United States, 498 F. Supp. 385 (N.D. Cal. 1980).] However, because of the rule requiring the failure to pay penalty to reduce the failure to file penalty for any month when both penalties apply, the maximum aggregate of both penalties is 47.5 percent of the tax liability, not 50 percent. This result occurs because when both penalties apply, the maximum penalty for failing to file is 22.5 percent ((5% × 5 months) − (0.5% × 5 months)). [See Treas. Reg. § 301.6651(f), Ex (2).]
Knappe v. United States. In Knappe v. United States, 713 F.3d 1164 (9th Cir. Cal. 2013), the Ninth Circuit Court of Appeals upheld the IRC Section 6651(a)(1) late filing penalty assessed against the executor of an estate who had relied upon an accountant's incorrect advice with respect to the deadline for filing the estate's tax return. The court's opinion in Knappe provides a good look at the analysis courts use in deciding whether to uphold a late filing penalty under IRC Section 6651(a)(1) and also provides important insight to executors on their liability risks under IRC Section 6651(a)(1) when they have relied upon the advice of accountants or attorneys with respect to filing and payment deadlines.
The Ninth Circuit Court of Appeals affirmed the lower court's decision, holding that it was the executor's "duty to ascertain the correct extended filing deadline," that the executor had "failed to execute ordinary business care and prudence by relying on his accountant's advice about this nonsubstantive matter", and that the executor had "[c]onsequently . . . failed to show 'reasonable cause' under [IRC Section 6651(a)(1)] to excuse the penalty."
The court noted that its decision places a "heavy burden on executors, who will affirmatively have to ensure that their agents' interpretations of filing and payment deadlines are accurate if they want to avoid penalties" but concluded that the "burden is justified by the government's substantial interest in ensuring that returns are timely filed."
The court concluded that it was the duty of the executor "to ascertain the correct extended filing deadline" and that "[b]y relying on his accountant's advice about that nonsubstantive matter, he failed to exercise ordinary business care and prudence, and he cannot show reasonable cause to excuse the penalty."
A petition for certiorari was filed on July 3, 2013...
Given the differing views on the question and the Supreme Court's recognition of the disagreement among the courts, there is a good chance that the Supreme Court will grant cert and review the Ninth Circuit's decision in Knappe. In the meantime, the Knappe decision provides a good look at the analysis used by court's in reviewing late filing penalties under IRC Section 6651(a)(1)
and the potential liability of executors under IRC Section 6651(a)(1) in the context of their relying upon advice from accountants or attorneys on filing and payment deadlines.
* Diane L. Mutolo, J.D., LL.M. is a member of the New York Bar, and her LL.M. is in Taxation. She is the update author for the LexisNexis Matthew Bender treatise, How to Save Time and Taxes Preparing Fiduciary Income Tax Returns.
LEXIS users can access the complete commentary HERE. Additional fees may apply (Approx. 19 pages)
RELATED LINKS: For more information on the penalty under IRC Section 6651(a)(1), see:
Discover the features and benefits of LexisNexis® Tax Center
For quality Tax & Accounting research resources, visit the LexisNexis® Store