In Estate of Hake v. United States, two executors of their mother’s estate filed the estate tax return on the date that their tax attorney advised them it was due.
Unfortunately, the attorney erred and the estate filed the return six months late. Pursuant to IRC § 6651(a)(1), the Internal Revenue Service imposed a $197,868.26 late filing penalty. The U.S. District Court held that the estate should not be liable for the penalties, reasoning that the executors had reasonable cause for filing late because they relied on their attorney’s advice.
The ruling in Hake should be distinguished from that of United States v. Boyle. First, Boyle is a decision of the Unites States Supreme Court and is definitive, compared to the opinion of the District Court in Hake. Second, in Boyle, the executor had delegated the duty to file the return to the attorney who, by an oversight, filed the return three months late, resulting in a late filing penalty. The Court held that the duty to file a return cannot be delegated and the obligation to timely file falls on the executor. Because knowing that returns are due at prescribed times requires no specific expertise, the reliance in that situation is not reliance on expert advice and is not reasonable. The Court left open the issue of whether there is reasonable cause for a late filing when a taxpayer receives erroneous advice from a tax professional about a return’s due date.
The court in Hake articulated three scenarios that courts generally address concerning delegation. First, as in Boyle, where a taxpayer delegated the task of filing to an agent. Second, as in Hake, where a taxpayer relies on a tax professional’s advice of resulting in filing a return after the due date but within the time that the professional advised was available. Third, where a tax professional advises a taxpayer on a matter of tax law.
As seen in Boyle and its progeny, it is clear law that the duty to file a tax return may not be delegated to another person, even an attorney. If such delegation does occur, any error in the filing will not be excused.
However, as seen in Hake, if a taxpayer relies on advice from an attorney which is incorrect, such reliance may be reasonable cause for the errors and removal of any penalties. As noted in Hake, this second scenario does not always hold true due to a current split in the courts. In several courts, the advice relied upon must be objectively reasonable in nature before it can be relied upon. An example of unreasonable reliance is reliance upon erroneous advice regarding return filing deadlines which are not subject to extension. Still, other courts have found that reliance on professional advice is inherently reasonable.
In sum, taxpayers should never delegate the duty to file a return and, although taxpayer reliance on professional advice may prevent late filing penalties, taxpayers should verify the return’s proper due date to avoid potential penalties.