CPA’s Flawed Extension Request Results in Late Payment Penalty and Interest

IRS imposes late payment penalty and interest on an estate whose CPA submitted a flawed request for an extension of time to pay estate tax.

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Baccei v. U.S. (CA 9 02/16/2011)

IRS imposes late payment penalty and interest on an estate whose CPA submitted a flawed request for an extension of time to pay estate tax.

Facts.  Ronald Baccei served as trustee of the Eda O. Pucci 2004 Revocable Trust.  On September 17, 2005, Eda O. Pucci passed away, and Baccei was named executor of her estate.  Upon his appointment as executor, Baccei hired Dean Bagley, a certified public accountant, to prepare and file a federal estate tax return on behalf of the Pucci estate.  On June 16, 2006, Bagley filed a Form 4768 (Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes) to extend the June 19, 2006, filing and payment deadline.

Form 4768 contains four distinct parts, in addition to a signature line requiring the preparer to verify the accuracy of the information submitted under penalty of perjury.  Before filing Form 4768, Bagley completed only three of the required sections; he did not complete Part III, entitled “Extension of Time to Pay.”  Also, Bagley did not enter an extension period in the field labeled “Extension date requested,” nor did he check the box indicating that he was requesting a payment extension.  Under Part IV of Form 4768, Bagley reported that the amount of estate taxes “estimated to be due” and still owing was $131,327, and he left blank the field labeled “Amount of cash shortage.”

In submitting the Form 4768, Bagley enclosed a letter dated June 16, 2006, entitled “Request for extension of time to file and pay U.S. Estate Tax.”  The letter clearly explained that the estate was seeking an extension of time to pay and stated the reason why the estate needed the payment extension.  The letter did not indicate the period for which the estate was requesting the extension.

On December 19, 2006, Bagley filed the federal estate tax return on behalf of the Pucci estate, and reported that the estate tax owed actually amounted to $1,684,408.  On February 5, 2007, the IRS notified Baccei that the federal estate tax had not been paid by the June 19, 2006 deadline.  Consequently, the IRS assessed a penalty of $58,954.28, plus $69,801 of interest against the estate.

On February 22, 2007, Baccei submitted a payment of $128,755.28 to the IRS, and requested that the IRS abate the late payment penalty and interest, claiming that Bagley “had in fact sent an application for extension of time to file a return, Form 4768, on June 16, 2006.”  The IRS responded that the penalty and interest were properly assessed, as Baccei had filed the return by the extended due date but failed to request an extension of time to pay the tax.  Accordingly, the IRS denied Baccei’s claim for a refund on the basis that Baccei failed to properly request an extension of time to pay the estate taxes owed.

Baccei sued for refund in federal district court but lost on summary judgment.  On appeal, he advanced three arguments, each rejected by the Ninth Circuit as explained below.

Substantial compliance doctrine inapplicable.  Baccei argued that the district court erred in holding the substantial compliance doctrine inapplicable to regulations governing requests for extensions of time to pay estate tax.  The Ninth Circuit noted that the doctrine of substantial compliance is an equitable doctrine designed to avoid hardship in cases where a party has done all that can be reasonably expected.  However, the court found that Baccei could not rely on the doctrine to excuse his failure to properly request an extension of time to pay the estate tax because doing so would defeat the policies of the regulations governing requests to extend the time for paying estate tax.  The regulation is designed to provide the IRS with the information necessary to determine whether an extension of time to pay is warranted and, if so, to determine a reasonable length for that extension.  The regulation requires that the period of the extension be stated, and the estate did not comply.

No estoppel.  Baccei also argued that the federal district court erred in denying his estoppel claim.  Specifically, he claimed that IRS had an obligation to inform him that his payment extension request was deficient, and to provide him with an opportunity to amend his extension application or otherwise mitigate the late payment penalty.  He said the IRS did not fulfill its obligations and may not profit from its “own wrong” by imposing a late payment penalty and assessing interest.

The Ninth Circuit noted that in addition to establishing the four traditional elements of estoppel, a party asserting this claim against the IRS must also establish that the IRS engaged in affirmative misconduct beyond mere negligence.  The Court determined that Baccei did not meet this burden because affirmative misconduct requires an affirmative misrepresentation or affirmative concealment of a material fact.  Baccei did not point to any affirmative misconduct by the IRS, just inaction on its part.  The Court held that the IRS’s failure to inform a taxpayer that he has not properly requested an extension is mere inaction that cannot support a claim of equitable estoppel.

No reasonable cause for late payment.  Baccei’s final argument was that his failure to timely pay estate tax was due to reasonable cause.  Baccei argued that he exercised “ordinary business care and prudence” in relying upon his accountant, Bagley, to competently file a payment extension request.  The Ninth Circuit disagreed, holding that Baccei’s reliance upon Bagley to competently file a payment extension request does not constitute reasonable cause excusing Baccei’s failure to timely pay the estate taxes owed.  Although Baccei was entitled to retain an accountant to seek a payment extension, he was responsible for either identifying the payment deadline and ensuring that payment was made before that deadline, or confirming that a payment extension had been properly requested and granted.  By failing to confirm that an extension had been requested and granted before the payment deadline lapsed, Baccei failed to exercise the “ordinary business care and prudence” necessary to establish reasonable cause.