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In Baccei v. U.S. (9th Cir. Feb 16, 2011), the estate’s accountant failed to properly complete Form 4768 requesting an extension of time to pay estate tax and the IRS assessed a late payment penalty. The estate paid the penalty and sued for a refund. The estate lost in District Court and appealed to the Ninth Circuit Court of Appeals, which court also held for the IRS.
The estate did not have access to liquid funds to pay estate tax and prepared a Form 4768 to extend the time to file the estate tax return and to pay the estate tax. However, the estate’s accountant failed to complete Part III of Form 4768, which is the part of the form that requests an extension of time to pay the estate tax and sets forth the desired extension period . The estate’s accountant enclosed a letter with the Form 4768 that requested an extension of time to pay the estate tax and set forth why the estate needed the extension. Nevertheless, the IRS determined that the extension request was not properly made and applied a late payment penalty. Interestingly, in the extension request, the accountant estimated the estate tax at $131,327. The actual tax was $1,684,408, more than ten times greater than the estimated amount. One wonders how this fact was taken into account in the IRS’s refusal to abate the penalty.
The estate made a number of arguments to the Ninth Circuit. First, the estate argued that it had substantially complied with the regulations since it had partially completed the extension request form and enclosed a letter requesting the extension and the reasons therefor. The court held that the doctrine of substantial compliance could not be used to defeat the regulatory purpose of providing the IRS with the information necessary to determine whether or not to grant the extension request. Importantly, the estate failed to include the desired extension period, which was deemed a necessary piece of information for the IRS to determine the extension request.
Second, the estate argued that the IRS should have informed it that the extension request was deficient and been given the opportunity to correct the problem. Therefore, the estate argued that the IRS should be equitably estopped from asserting the penalty. The court held that the estate failed to show that the IRS engaged in affirmative misconduct, which is a necessary element for the application of equitable estoppel.
Lastly, the estate argued that the failure was due to reasonable cause and not due to willful neglect. Here, the estate argued that reliance on the accountant is reasonable cause for the failure. The court held that reliance on a professional is not sufficient for the reasonable cause defense (see United States v. Boyle, 469 US 241 (1985)).
Thus, the court did not find any grounds upon which to remove the late payment penalty. This was the correct result, but it seems to me the IRS could have shown some leniency here. If Part III of Form 4768 had been properly completed, the IRS would almost certainly have granted the extension request. I cannot recall a time where I have not been granted an extension of time to pay the estate tax. Thus, even though the taxpayer clearly failed to properly complete the extension request, the IRS could have granted it nonetheless and one wonders why they chose not to in this case. I think this case is a good reminder to not take anything for granted, even things you may view as perfunctory.