An appeals court found a taxpayer liable for penalties and interest after he authorized a preparer to e-file returns on his behalf, but the preparer failed to do so. While it has long been established that a taxpayer is responsible for any unpaid taxes when their preparer fails to file their returns, the decision marks the first time an appeals court has applied the rule to situations where the preparer must e-file a return.

The taxpayer in the case maintained that he should not be penalized for failing to file his returns for three tax years because he reasonably relied on his CPA to e-file them on his behalf. The U.S. Court of Appeals for the 11th Circuit disagreed, ruling in Lee v. U.S., No. 22-10793 (11th Cir. 2023), that the taxpayer’s reliance on his preparer to e-file on his behalf did not constitute reasonable cause for failing to file his returns.

The court also used the decision as an opportunity to discuss what constituted reasonable cause for failure to file and failure to pay under §6651(a).

Taxpayer authorized filing of the returns

The taxpayer in the case, Wayne Lee, hired Kevin Walsh, CPA, to prepare and file his federal income tax returns for 2014 through 2016. Since Walsh’s firm, ATROX Partners, prepared and filed more than 10 federal tax returns each year, Treasury regulations required Walsh to e-file all of the returns he prepared. Lee had signed Form 8879, IRS e-file Signature Authorization, authorizing Walsh to e-file the returns on his behalf.

Each of Lee’s returns claimed about $1 million in gross income and showed six-figure overpayments that Lee chose to apply to his estimated tax for the following year. However, no returns were filed for the years at issue. Lee maintained that Walsh had told the IRS his returns were too complex for ATROX’s tax software. Lee said the mailing address on file for him was incorrect, so he learned about his unpaid taxes when an IRS agent visited his office in December 2018. Lee claimed Walsh agreed to update his mailing address, but never did so.

Lee submitted his 2014 through 2016 returns shortly after receiving the visit from the IRS agent, but the lookback period for calculating his credits began in June 2015. Since Lee made no 2014 tax payments after April 2015, the IRS disallowed his $288,409 overpayment. This resulted in Lee owing taxes for 2015 and 2016, as well as more than $70,000 in penalties for failure to file and failure to pay. Lee settled his outstanding tax liability and penalties in August 2019 by paying $289,183 to the IRS. A lawsuit Lee brought against ATROX to recover damages for Walsh’s negligent failure to file was settled in early 2020.

Lee also filed a lawsuit in a Florida federal district court, claiming that his late filing should be excused due to his reliance on his CPA to e-file the return. The court granted summary judgment to the government after finding Walsh’s failure to file the returns did not constitute reasonable cause under §6651.

Boyle decision lays out ‘bright line’ rule

In his appeal to the 11th Circuit, Lee’s primary argument was that the bright-line rule established in by the U.S. Supreme Court in its 1985 decision on U.S. v Boyle states that reliance on an agent does not constitute reasonable cause for failure to file does apply to e-filed returns. In the Boyle case, the taxpayer relied on his attorney to file his returns by the filing deadline and had even checked in on his progress several times. The Supreme Court found that §6651(a)(1) imposes an unambiguous duty for taxpayers to file their return on time and that reliance on an agent is not a substitute for compliance with filing deadlines. While the Boyle decision involved a taxpayer’s failure to file, the 11th Circuit noted that a number of courts have found it also applies to a taxpayer’s failure to pay.

E-filing not treated differently from paper filing

Lee contended that Boyle did not apply to his situation because Form 8879 makes e-filing fundamentally different from paper filing. The court said the form authorized ATROX to sign the return and send it to the IRS, but authorization to file the return is not the same thing as filing a return. The act of signing Form 8879 does not transmit it to the IRS; therefore, the taxpayer is not relieved from exercising ordinary business care and prudence when filing a return or paying taxes. The court also rejected Lee’s claim that signing Form 8879 took the matter out of his hands, finding that his reliance on an agent did not absolve him from the responsibility to file on time.

Next, the court looked at Lee’s claim that e-filing shifted the burden of filing from the taxpayer to tax preparers and that Walsh had a legal duty to submit his tax returns to the IRS. The court found that, despite Lee delegating tax preparation and filing to Walsh, he maintained complete control over the process. It added that signing Form 8879 did not complete the filing process because Lee’s returns would not be considered filed until he received an acknowledgement from the IRS.

“No doubt, if the facts are as Lee alleges, then Walsh breached his contractual and ethical obligations to Lee. Walsh may be liable to reimburse Lee for the damage his negligence has caused,” the court said. “But Walsh did not assume Lee’s legal duties to file timely tax returns and to pay taxes. Walsh’s potential liability to Lee (which they have already litigated and settled) does not extinguish Lee’s liability to the IRS.”

Court looks at §6651(a) reasonable cause

The 11th Circuit used its decision on Lee’s case to address for the first time the question of whether e-filing would have altered its §6651(a) analysis if Boyde had not applied to the case. It found that the statutory obligation to timely file a tax return and pay the tax due does not depend on the filing medium.

While Lee did show some diligence by reviewing his tax returns, signing Form 8879, authorizing Walsh to e-file his returns each year and overpaying his 2014 taxes, the court found that he never took steps to confirm the returns were filed. It noted that Lee never contacted Lee or the IRS for confirmation. The court added that the 2014 tax overpayment can’t cure his failure to file.

“Unfortunately, Lee blindly relied on his agent to his detriment,” it explained. “We cannot say that such reliance, without more, amounts to reasonable cause under Section 6651(a)(1).”

The court then applied a similar analysis to the penalties imposed by the IRS for Lee’s failure to pay under §6651(a)(2)’s reasonable cause exception. While Lee contended there was nothing else he could reasonably have been expected to do to verify that his return had been filed, the court said he could have exercised “ordinary business care and prudence” by confirming that the IRS had received his 2014 return and overpayment. While Lees calculations of his tax liability for 2015 and 2015 were based on that claimed overpayment, he did nothing to ensure it had been filed.

Even if Lee had shown he used ordinary business care, the court said he needed to show that he was either unable to pay the tax or would have suffered undue hardship if he made them. However, Lee never claimed financial hardship prevented him from paying taxes by deadline.

For more information on a tax preparer’s ethical obligations to their clients, check out our on-demand webinar on Ethics and the Tax Professional (free to NATP members) or our Ethics and Circular 230 Self-Study.