Should electronic filers be held to a higher standard than paper filers? That is how attorney Douglas Greenberg may be framing the appeal of the recent District Court decision in the case of John Spottiswood. Magistrate Judge Maria-Elena James ruled that Mr. Spottiswood’s penalties for late file and late pay of his 2012 return (0ver $130,000) were not being refunded. Here is the story.
Not Paying Attention
You could say we have another TurboTax defense going on here. Mr. Spottiswood used Turbo-tax to transmit the joint return of himself and his spouse, Nancy Miyaski. Mr. Spottiswood had a big gain and was filing with a balance due of nearly $400,000. On April 12 everything was entered and he pressed the transmit command or whatever and off his information went to the IRS. He didn’t log onto TurboTax again for eighteen months, which is when he got the message that his return had been rejected by the IRS, because the social security number of one of the dependents was incorrect. They had sent him an email to that effect, but he had overlooked that.
The part of the story that strains credulity just a bit was that he had not noticed that the four hundred grand had not come out of his checking account. I don’t know. His attorney pretty much conceded the late pay penalty, but still thinks the late file penalty is wrong. Of course, if the return had been processed as it was, the IRS would have sent out a bill relatively quickly, which would have mitigated the late pay penalty.
What Is A Return?
If Mr. Spottiswood had filed a paper return with the wrong social security for a dependent, the IRS would have accepted it as a validly filed return. He then might have gotten a notice, which if it was ignored would have resulted in the disallowance of the exemption and a bill for a few thousand dollar.
Attorney Greenberg gave me an analogy to a student turning in a paper. If you are filing a paper return, there might be some deficiencies. If it was a paper submitted in school you might have gotten a C+, but it is still a return. Filing electronically though even an A- is treated as an incomplete. It’s not that you are missing out on the honor role; you are going to the headmaster’s office to be thrashed.
Attorney Greenberg admitted that his client had been careless – not noticing that the nearly four hundred grand had never been debited and missing the email from Intuit that indicated the electronic return had been rejected. Nonetheless, there is an argument that late file should not apply, since the return that was submitted met the definition of a return. The authority cited is a 1984 Tax Court decision – Beard v Com.
First, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.
Judge Did Not Buy It
The judge did not buy the argument, but in part it may be because the argument was not made well enough.
While it is undisputed the IRS rejected the document Plaintiffs submitted in 2013 due to Plaintiffs’ error in inputting a dependent’s Social Security number, Plaintiffs argue the document met all of the Beard requirements, and as such should have been accepted for filing. Plaintiffs argue that the IRS would have accepted a paper-filed return containing the same error, and that the IRS unlawfully applied a more stringent standard to their electronically-submitted return.. Plaintiffs’ only support for this argument is a document entitled “Internal Revenue Manual Part 3. Submission Processing Chapter 11. Returns and Documents Analysis Section 3. Individual Income Tax Returns.” This document is not authenticated, and Plaintiffs establish no foundation for the document. The document shows a transmittal date of November 17, 2017, and Plaintiffs do not establish any foundation showing the IRS followed the procedures described therein when Plaintiffs attempted to submit their tax return more than four years prior to that date. Plaintiffs also establish no foundation to show their interpretation of the procedures described in the document is correct. Plaintiffs fail to create a triable issue that the same mistake contained in their submission would have been treated differently if it had been presented as a paper filing, and that the IRS’ rejection of their submission because it contained an erroneous Social Security number was not lawful. (References omitted. Emphasis added.)
This is why I am not a lawyer or a judge. (Well actually there are other reasons, like not having gone to law school, etc.) He is citing the Internal Revenue Manual. What’s to authenticate? You can check it on irs.gov.
The IRS rejected their filing because it contained an error; the IRS thus could not calculate Plaintiffs’ tax liability. Plaintiffs fail to create a triable issue that they timely filed their 2012 tax return.
That I really don’t get. A social security number error does not prevent one from computing the tax.
There is already a similar case headed to the Fifth Circuit for appeal. Christopher Haynes had used a paid preparer to file his 2010 joint return and had no reason to know that the return had been rejected. The crux of that decision is that you cannot delegate responsibility for meeting the due date of a return. If that is the logic the IRS is going to follow, then maybe we should all go back to filing paper returns. That will show them . The American College of Tax Counsel has filed an amicus brief on the Haynes case.
Practical Take Away
Both Haynes and Spottiswood were filing at close to the last minute. That is generally a bad idea. More important though, there is a sure way to verify that the return that you think was filed electronically (or mailed) was actually accepted by the IRS. You can go to Get Transcript on irs.gov. I wrote about that here in discussing another case that was even more complicated.
Ed Zollars has a summary on Current Federal Tax Developments.
Leslie Book has an extensive discussion, with some good links on Procedurally Taxing.
I am sympathetic to this argument, as the IRS’s current approach essentially creates an additional burden for e-filers who, if they had just mailed the return in the old fashioned way, would not have found themselves facing a late filing penalty.
The court sidestepped the argument though because Spottiswood failed to establish that in fact IRS would have treated the information in a paper return differently than the e-filed return …..
With a better foundation, the court would have had to address this issue head on, and I think it is a close case and requires courts and IRS to apply some fresh thinking on the issue.
That makes me a little optimistic for the Ninth Circuit appeal that Mr. Greenberg told me is 99% certain to be filed.
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