The Ninth Circuit Court of Appeals held that erroneous advice from an accountant that an estate tax return (IRS Form 706) could be extended for filing and payment purposes by one year did not qualify for penalty abatement as “reasonable cause.”

In Knappe v. United States, 2013 U.S. App. LEXIS 6809 (9th Cir. Apr. 4, 2013), the executor of an estate hired an accountant to assist with the filing of the estate tax return. Due to complexities concerning valuation of the estate, it was determined that a filing extension would be required.

The accountant prepared IRS Form 4786 requesting an extension of time to file and pay the estate tax. The accountant incorrectly advised the executor that the extension would be granted for a one year period; this type of extension is only granted for a six-month period of time and may not be further extended.

The accountant reviewed the instructions to Form 4786, the relevant statute and regulations, but still erred in his determination of the applicable extension period.

The estate tax return was filed four months late; as a result, the IRS assessed a 20 percent delinquency penalty.

The executor requested penalty abatement under Internal Venue Code Section 6651(a)(1), indicating the delay in filing was based upon reasonable cause and not willful neglect. The request was denied and an action was filed by the executor. The district court granted the IRS’ motion for summary judgment; the executor appeals.

The Ninth Circuit reviewed whether the requisite showing of reasonable cause had been met. Reasonable cause exists if a taxpayer “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.” Knappe v. United States, 2013 U.S. App. LEXIS 6809, slip op. at *11-*12 (quoting 26 C.F.R. § 301.6651-1(c)(1)).

The Ninth Circuit determined that the executor was not reasonable in relying upon the accountant’s advice, which was not substantive in nature. The court said the initial deadline to file the estate tax return was clear, and although the court acknowledged the rules for filing extensions are more difficult to understand, they are unambiguous nonetheless.

This is troubling news for all taxpayers and fiduciaries who rely on the advice of a tax profession with regard to filing instructions. Taxpayers often hire tax professionals for the very reason that they do not feel they have the time or qualifications to sufficiently understand tax forms or filing instructions. The Ninth Circuit would require the instructions to be ambiguous in order for a taxpayer or fiduciary to reasonably rely upon the erroneous advice of a tax preparer.

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