In Lee v. United States, 2023 U.S. App. LEXIS 28228 (11th Cir. Oct. 24, 2023), the court affirmed the Middle District of Florida’s decision that the bright-line rule from United States v. Boyle, that reliance on an agent did not amount to reasonable cause for failure to file a tax return on time, also applies to e-filed returns. Lee is the first circuit court decision to hold that a taxpayer who relied on an agent to e-file a return did not have reasonable cause for purposes of the failure to file penalty.
Dr. Wayne Lee, a surgeon with a complex return, hired a CPA, Kevin Walsh, to file his tax returns in 2014, 2015, and 2016. After reviewing the returns that Walsh prepared, Lee signed Form 8879, which authorized Walsh to e-file on Lee’s behalf. However, Walsh never filed any returns with the IRS, allegedly because Dr. Lee’s returns were too complex for the CPA firm’s software.
Lee did not realize that his returns had not been filed until an IRS agent visited his office in December 2018. Lee immediately submitted his unfiled returns and paid the IRS the tax, interest and penalties. Lee sued for a refund of failure to file penalty, claiming his reliance on Walsh was reasonable cause to excuse the late filings. Lee also sued Walsh and his firm for malpractice and settled the suit in 2020.
The penalty at issue in Lee is the section 6651(a)(1) failure to file penalty, which applies unless the late filing “is due to reasonable cause and not . . . willful neglect.” Reasonable cause requires that the taxpayer “exercised ordinary business care and prudence” but was still unable to file the return or make the payment on time. Treas. Reg. § 301.6651-1(c)(1).
In Boyle, the Supreme Court established a bright line rule—a taxpayer’s reliance on an agent to file a return, without more, does not constitute reasonable cause for failure to timely file. 469 U.S. 241, 248, 252 (1985). This is because taxpayers, not their agents, are responsible for filing returns on time. Id. at 250.
Because Boyle involved paper returns that taxpayers could mail themselves, and e-filing necessarily involves an agent authorized by the IRS for this purpose, taxpayers have argued that the Boyle bright line test should not apply to e-filings. Although the Fifth Circuit was presented with this issue in Haynes v. United States, Dkt. 17-50816 (Jan. 29, 2019), that court issued a brief opinion remanding the case for further factual development and did not issue a substantive decision. On remand, the parties settled the case, and the taxpayer received a payment.
In Lee, the Middle District of Florida granted the government’s motion for summary judgment and concluded that Boyle’s bright-line rule applied to returns intended to be e-filed. In an opinion written by Judge Brasher, the Eleventh Circuit affirmed the district court, becoming the first circuit court to address the issue.
The court rejected the taxpayer’s argument that e-filing is fundamentally different from paper filing because Lee had signed Form 8879, certifying that the return is true, correct and complete and authorizing Walsh to e-file the return, and that there was therefore nothing left for him to do, rendering Walsh’s failure to e-file beyond his control. The court did not see this as a distinction from Boyle because signing Form 8879 is an authorization and does not actually transmit the return. Moreover, signing Form 8879 did not relieve Lee from exercising ordinary business care, in particular by ensuring the return was e-filed. In other words, Lee’s choice to trust Walsh to e-file the return did not strip Lee of the ability to ensure that Walsh actually filed the return.
The court also rejected Lee’s second argument, that e-filing is beyond the scope of responsibility of the ordinary taxpayer. He relied on IRS publications that stated tax preparers should not wait more than three days after receipt of Form 8879 to file tax returns. However, IRS publications cannot overturn Boyle, a Supreme Court precedent. The court also noted that Lee maintained full control over the process and was not forced to work through an agent. Finally, even if Walsh breached his contractual or ethical duties to Lee (a matter that the court noted had been litigated and settled), this breach did not extinguish Lee’s liability to the IRS. The court noted that if the complexity of e-filing excused late filing by an agent, the overwhelming majority of taxpayers would have reasonable cause for late filing.
Judge Lagoa specially concurred with the court’s decision, highlighting the “precarious situation” faced by taxpayers who rely on accountants. Judge Lagoa noted that many taxpayers need a tax preparer to assist with their returns, and the vast majority of tax preparers are defaulted into the e-filing system, leaving the taxpayer on the hook for a failure to e-file. In Judge Lagoa’s view, tax return preparers should specifically advise their clients of their responsibility to ensure that their returns are successfully submitted.