Question: An estate filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, just over three months after the return was due. As a result, the IRS imposed a failure to timely file (FTF) penalty under §6651(a)(1) of $450,238 as well as other deficiencies. The estate appealed the deficiency finding in U.S. Tax Court and requested an abatement of the FTF penalty because it made an $11.6 million dollar payment with its timely filed extension. The return showed tax liability of $10.6 million. This resulted in a refund of $1.6 million. The estate felt it should not have to pay the penalty because the extension payment covered the liability and contended that it had reasonable cause for filing late. The Tax Court disagreed, leaving a FTF penalty in place. Was the estate unjustly penalized in this situation?
Answer: No. When the court addressed this issue in Estate of Richard D. Spizzirri v. Comm’r, T.C. Memo. 2023-25, it relied on the strict penalty regime established for late filing of estate tax returns applicable even when full payment is made on time. For each month a federal estate-tax return is late, the IRS must impose a penalty of 5% of the tax due (up to a limit of 25%) unless it is shown the failure to file on time is due to reasonable cause and not willful neglect [§6651(a)(1)].
Although the estate tried to establish that it had reasonable cause for late filing by claiming it did not want to file an incomplete or inaccurate return while litigation was pending with the deceased’s fourth wife, the court concluded that the excuse did not constitute a reasonable cause for the delay and let the penalty stand. It said the estate has a duty to file a return based on the best information available. There is no duty to file a return reflecting perfect information of the estate’s assets because an estate can file another Form 706 with supplemental information to reflect new information [§20.6081-1(d)]. Therefore, problems with assembling or valuing the estate’s assets do not constitute reasonable cause for purposes of avoiding the penalties under §6651.
The full payment issue had no bearing on the assessment of the penalty. Therefore, full payment notwithstanding, the estate tax return was filed three months later than its due date, and a FTF penalty under §6651(a)(1) remained.
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