California: Late Filing Penalty Abatement
| Case No.: | 12345 |
| Taxpayer: | Jane Smith |
| Address: | PO Box 12345 San Diego, CA 92115 |
| Tax Year: | 2010 |
| Date: | November 22, 2013 |
Whether the appellant's reliance on the advice of a tax professional that she did not have to file a tax return in California after full disclosure of the material facts creates reasonable cause for abatement of the delinquent filing penalty.
The appellant consulted with Enrolled Agent, [John Doe] of [ACME Tax Services] (tax professional), for a number of years before 2010. (Exhibit A.) Because of this relationship, the tax professional was familiar with the appellant's assets. (Ibid.) These assets included a condo located in California. (Ibid.) In 2009, the appellant changed her residence from California to Arizona. In 2010, the appellant sold her California condo. The fact that the California condo was sold in 2010 was known to the tax professional when he prepared the appellant's 2010 taxes. (Ibid.) The tax professional timely filed the appellant's federal (Exhibit B) and Arizona (Exhibit C) income taxes for 2010. However, the tax professional erroneously believed that because the tax payer was a nonresident of California, she would not be liable for any California taxes on the gains realized on the sale of her condo. (Ibid.)
On February 29, 2012, the respondent issued a notice of proposed assessment (Exhibit D). In response appellant filed a 540NR and remitted the tax amounts owed to California (Exhibit E). Further, the appellant paid the assessed late filing penalty in the amount of $1,618 (Exhibit F). On July 31, 2012, the appellant appealed the assessment of the late filing penalty and requested a refund (Exhibit G). This request was denied by the respondent (Exhibit H).
- Appellant is not liable for delinquent-filing penalty
California tax law states that any taxpayer will be liable for a delinquent filing penalty if the taxpayer fails to file her tax returns when they are due. (Rev. & Tax. Code, § 19131.) However, the statute provides an exception for those taxpayers that can show that the delinquent filing: (a) was due to a reasonable cause; and (b) not due to willful neglect. (Ibid.)
- Appellant's reliance on her tax professional's advice constituted reasonable cause.
Reliance on a tax professional can constitute reasonable cause. Since California law does not define reasonable cause, California has historically looked to federal case law for guidance. (See Appeals of Yvonne M. Goodwin, 97-SBE-003, March 19, 1997.) There it has been ruled that while the burden of ascertaining the statutory deadline for filing falls on the taxpayer, there are circumstances that warrant late filing penalty relief. (U.S. v. Boyle (1985) 469 U.S. 241, 249-50 [105 S.Ct. 687, 692, 83 L.Ed.2d 622].) The Court accepted the elements of a reasonable cause test laid out in the lower court opinion. (Rohrabaugh v. U.S. (7th Cir. 1979) 611 F.2d 211.) The test required: (1) the taxpayer be unfamiliar with the tax law; (2) the taxpayer discloses all relevant facts to the tax professional; and (3) the taxpayer has otherwise exercised ordinary business care and prudence. (Boyle at 244.) The Court then added a fourth element that the advice relied upon must concern a question of law. (Ibid at 250.) The opinion explained that a question of law includes advice that it was unnecessary to file a return. (Ibid.)
In Boyle, the taxpayer was appointed the executor of his mother's estate. The taxpayer consulted with an attorney who informed the taxpayer that his mother's estate would be required to file an estate tax return. The taxpayer disclosed all relevant information to the attorney. The taxpayer then relied on the attorney to file the appropriate return before the deadline. Unfortunately, there was a clerical error on the attorney's master calendar and the return was filed three months late. The court said that even though the taxpayer was a businessman and that he had been the executor of another estate he was not deemed to be familiar with tax law. The court was also satisfied that the taxpayer had disclosed all relevant information to the tax professional and that seeking the advice of a tax professional is the exercise of ordinary business care and prudence. However, the court said that the taxpayer had not relied on the erroneous advice of the attorney concerning a question of law. It reasoned that the deadline is unambiguous and due date was not a question of law.
Similar to the taxpayer in Boyle, the appellant is not familiar with tax law. Although the appellant is a criminal attorney, she has no special training in tax law. Just as it would not be prudent to ask your tax professional to represent you in a criminal case, it is not prudent to ask a criminal attorney to represent you in tax matters. California tax law is voluminous and in order to be familiar with tax law it requires many years of study and even more years of practice to become proficient in the field. The appellant has taken no formal classes for California tax law nor has she worked as a tax professional. The appellant satisfies the requirement that she be unfamiliar with tax law.
The appellant fully disclosed all relevant facts to the tax professional she relied on. In support of this assertion, the appellant has been able to procure a letter from the tax professional who prepared her 2010 taxes. (Exhibit A.) This letter indicates that the professional has had a long professional relationship with the appellant. Sworn under penalty of perjury, the tax professional states that the appellant provided all relevant facts in order to determine if the appellant would have to file a California tax return for 2010. Having actual knowledge of her disposition of the California condo, the professional writes that he "didn't realize that California taxes all property sales whether or not the taxpayer is a resident." The appellant satisfies the requirement that all relevant information be disclosed to the tax professional whose advice she relied upon.
The appellant has otherwise exercised ordinary business care and prudence. In Boyle, the Court indicated that when a taxpayer is unfamiliar with tax law, the taxpayer exercises ordinary business care and prudence when she employs a tax professional regarding substantive questions. To require a taxpayer to question the advice or get a second opinion would nullify the very purpose of seeking the advice of the presumed expert. Absent knowledge that the tax professional is incompetent this prong is easily satisfied. The appellant has successfully relied upon the advice of her tax professional for many years. There has been no indication that the tax professional is incompetent. The appellant satisfied the requirement that she exercise ordinary business care and prudence when she consulted a tax professional.
Unlike the taxpayer in Boyle, the appellant relied on a tax professional regarding a question of law. The tax professional has prepared the appellant's taxes for a number of years. The tax professional had full knowledge of the sale of the California condo in 2010. The tax professional erroneously advised the appellant that she was not required to file a California income tax return for 2010. The appellant timely filed her Federal and Arizona income tax returns for 2010. Reasonably relying on the advice of the tax professional, no California return was filed for 2010. The appellant satisfies the final prong of the reasonable cause test because the reliance concerned a question of law.
The respondent attempts to add the additional requirement that the taxpayer affirmatively ask about specific California tax liabilities. This requirement is unsupported by case law and would also effectively nullify the very purpose of seeking the advice of a tax professional.
The appellant's circumstances fit squarely within the exception discussed in Boyle. The appellant is unfamiliar with tax law, she disclosed all relevant information, she exercised ordinary business care and prudence and the reliance concerned a question of law. Having satisfied all four prongs required in Boyle, the appellant's reliance on her tax professional's advice constituted reasonable cause.
- Appellant's delinquent-filing was not due to willful neglect.
Like "reasonable cause," the term "willful neglect" is not defined in California code. The Court in Boyle, said that "willful neglect" may be read as meaning a conscious, intentional failure or reckless indifference. (Boyle at 245.)
Appellant's failure to file her 2010 California income tax return was not due to willful neglect. The respondent's brief does not dispute this assertion. There is no indication that the appellant made a conscious effort to conceal the sale of her condo from her tax professional. Further, there was no intentional failure to file or reckless indifference as to her duty to file a return. The fact that the appellant filed the appropriate income tax returns with the federal government and the state of Arizona for 2010 supports this assertion. Additionally, when the error was brought to the appellant's attention she promptly filed the appropriate return and paid all amounts owing.
The appellant is entitled to a refund of the $1,618 delinquent filing penalty. The appellant has shown that her delinquent-filing was due to a reasonable cause and not due to willful neglect. The appellant has shown: (1) that she is unfamiliar with tax law; (2) that she disclosed all relevant facts to her tax professional whose advice she relied upon; (3) that she has otherwise exercised ordinary business care and prudence; and (4) the advice she relied upon was a question of law. There is nothing that indicates that the appellant's failure to file in a timely manner was due to willful neglect. Because the appellant has satisfied all of the requirements to show reasonable cause, she is entitled to a full refund of the delinquent-filing penalty.
Date: November 22, 2013
Respectfully Submitted,
Student Attorney, Tax Appeals Assistance Program
USD Legal Clinics
5998 Alcala Park, Barcelona #305
San Diego, CA 92110-2492
