No Mercy For You When Your CPA Does Not File Your Tax Return

It is but natural to rely on your certified public accountant (CPA) or tax professional to file your returns electronically. But imagine a situation in which your CPA or tax pro didn’t file your return. Then you have a problem to be addressed.

The situation happened to a Florida surgeon Wayne Lee whose earnings were over $1 million per year. Though Lee hired a CPA to prepare his taxes for 2014, 2015 and 2016, reviewed the return and signed IRS form 8879 authorizing the CPA to file electronically, he was in for a shock when, at a later date, an IRS agent visited his office and informed him that he failed to file any returns for the above years.

Now Lee had moved into a new office and informed the CPA to update the address with the IRS and they failed to do so. The result was Lee missed all the notifications from the IRS. When sought explanation from the CPA, they admitted that he did not file returns & that the CPA’s tax preparation software was not capable of handling Lee’s complex tax returns.

Following these two problems arise:

Problem 1

It was a practice for Lee to overpay his estimated taxes so that he would not be penalized when he filed his taxes. Then he would apply his overpayments for the current year to his next year’s returns.

For Lee, the CPA did not file his returns for 2014, 2015 and 2016, which means the overpayment strategy failed. Lee lost his 2024 overpayment of $288,409 to the statute of limitations. This leads to the next problem.

Problem 2

To rectify the follies of the CPA, Lee late-filed his returns for 2014, 2015 and 2016. He owed the IRS $70,000 for failure to file and failure-to-pay penalties. Though Lee paid his dues, he sued the IRS for a penalty refund but eventually lost.

Failure-to-file and failure-to-pay are penalties for taxpayers who do not file returns on time. The consolation is that there is an exception for taxpayers who have a reasonable cause for not filing returns on time. So, how do we define reasonable cause, it is the “taxpayer exercised ordinary business care and prudence but was still unable to file the return on time or pay the tax.”

But in the case of Lee, the United States Supreme Court held in 1985 that a failure to timely pay tax returns is not excused by a taxpayer’s reliance on an agent to file them. The Supreme Court declared that it is a ‘bright line’ rule to which there are no exceptions.

Moreover, the Supreme Court said that the duty to file a tax return is non-delegable. Even though, a taxpayer delegates the duty to another, like an accountant or attorney, is legally obligated to check that the returns are filed timely.

Lee fought that the Supreme Court’s paper-filed Boyle rule should not apply to e-filed returns. Lee’s CPA had Lee review and approve the returns and sign Form 8879, IRS e-file Signature Authorization, thereby permitting CPA to e-file them. The point is taxpayers cannot e-file returns and hence the filing was beyond his control. The court dismissed this argument stating that it was the duty of the taxpayer to check if the return was submitted to the IRS.

The National Taxpayer Advocate reported to Congress calling the case “grossly unfair”. The Advocate recommended the law be changed so that if a tax return preparer fails to e-file a client’s return the taxpayer should be eligible to receive reasonable-cause relief from the failure-to-file penalty.

Check with the IRS

As of now there is no pending legislation in this connection. It is the responsibility of the taxpayer to check with the IRS if the CPA has e-filed their tax return. The process can be done online on irs.gov. It takes about two to three weeks for the transcript to show. If it does not show, check with your tax preparers.

File your return yourself

You can file your returns yourself, but you can do so by mail. Taxpayers cannot electronically file their returns and need the assistance of a tax preparer. Your preparer must complete Form 8948, Preparer Explanation for Not Filing Electronically and attach it to the paper tax return you will mail. Filing a paper return will significantly slow the IRS processing of your return, which may prove a hardship of you are owed a refund.

Takeaways

The taxpayer holds the responsibility for filing their returns with the IRS and is subject to failure-to-file and failure-to-pay penalties on default.
The failure to e-file returns on the part of the CPA or tax preparers is not reasonable cause for excuse to impose penalties.
To prevent penalties, you should check with the IRS to ensure your returns are filed on time on the IRS website.
You can file your returns by mail or private delivery service. Your preparer must attach IRS form 8948 to the paper tax return that will be sent by mail.