IRS Practice and Procedure News Briefs for March 2020

Why this Notice is Important: This notice is one of the many steps the federal government has taken in an effort to relieve the economic and other burdens individuals and businesses are facing as a result of the COVID-19 pandemic.

Effect of Notice: As most everyone knows, individual and C corporation tax returns and payments generally are due April 15 of each year. In light of the economic crisis the country is facing, the government announced that any person or entity (including corporations, trusts, and estates) with a tax return due April 15, 2020, is granted an automatic 90-day extension on filing and payment. This means that 2019 income tax returns and payments that would have been due April 15, 2020, are now due July 15, 2020. Taxpayers will be able to request filing extensions beyond July 15 using normal procedures. The extension also applies to the 2020 first quarter tax deposit that was due April 15, 2020, which now is due July 15, 2020. However, the deadline for the second quarter deposit (June 15, 2020) remains in place. 

Why this Case is Important: When taxpayers incur IRS late-filing and late-payment penalties, one of the first things they ask often is whether the penalties can be waived. This case provides a good summary of the law of penalty abatements and is a good example of why corporate tax penalties rarely are waived.

Facts: Hunter involved an S corporation with 9 shareholders. Between 2011 and 2013, while Christopher Cacciatore was the company’s president and a 50% shareholder, Victor Cacciatore acted as its CEO and board chairman, with control over all of the company’s financial and tax functions. The company’s outside accountant, George Tapling, functioned as the company’s CFO, with sole responsibility for preparing and filing its tax returns. Victor was diagnosed with cancer in 2008 or 2009, was incapacitated during the years at issue, and passed away in late 2013. Tapling also was diagnosed with cancer in 2010 and passed away in 2016. During the years in question, he maintained his CFO responsibilities but, unbeknownst to the company, stopped filing its tax returns in 2010. Following his death, the company discovered the lack of filings. When the IRS assessed late filing penalties and interest totaling over $58,000, the taxpayer requested a penalty abatement based on the illnesses of Victor and Tapling. The IRS denied this request and, after paying the penalty, the taxpayer filed a petition for a refund.

Law and Conclusion: Section 6699 of the Internal Revenue Code imposes a late-filing penalty in the event that an S corporation fails to file its annual Form 1120S on a timely basis. However, this penalty does not apply to the extent that the late filing was due to “reasonable cause” and not willful neglect. Reasonable cause exists if the taxpayer exercised “ordinary business care and prudence” but nevertheless could not file or pay the tax when due. On the other hand, willful neglect means a “conscious, intentional failure or reckless indifference.” The company argued that it acted with reasonable cause by relying on its outside CFO, Tapling, to timely file its returns, and that the illnesses of Victor and Tapling “incapacitated” the company to the point that it could not comply with its filing obligations. The Court found that those individuals’ illnesses did not incapacitate the company, as it still had a fully functioning president and other board members who had responsibility for ensuring the company’s tax compliance. It also held that a company does not exercise ordinary business care and prudence where it delegates all responsibility for tax compliance to one individual without any oversight. That being the case, it determined that the company did not act with reasonable cause and found in favor of the IRS.

If you would like more details about these cases, please contact me at 312-888-4113 or jnesser@lavellelaw.com.