A federal district court recently ruled in favor of an estate, upholding a reasonable cause/reliance defense against penalties for filing a late Form 706, United States Estate Tax Return. Successful challenges to late-filing penalties for estate tax returns are somewhat rare, so the ruling presents a helpful benchmark for the types of facts that may help establish a reasonable cause defense to late-filing penalties.
In Estate of Agnes R. Skeba v. United States, No. 17-cv-10231 PGS TJB (D.N.J. 2020), the United States District Court for the District of New Jersey assessed whether the estate demonstrated reasonable cause for filing a late estate tax return. The court ruled that the IRS incorrectly interpreted Internal Revenue Code § 6651(a)(1) when it calculated and assessed penalties and that the estate demonstrated reasonable cause for its late filing—a defense to those penalties.
The deadline for the estate to file its tax return was nine months after the June 10, 2013 death of the decedent, Agnes R. Skeba. The estate requested a six-month extension to pay its estate tax. The estate attached a cover letter explaining that the estate had limited liquid assets at the time of the decedent’s death and that the estate was waiting on a mortgage loan to close. The available funds were used to pay inheritance taxes, and a partial payment of $725,000 was enclosed along with the application. Only eight days after the original due date, the estate paid the remaining balance of the estate tax.
Due to pending estate litigation and delays in securing valuations and appraisals of the estate’s assets, which consisted mainly of farmland and farm equipment, the estate was granted a six-month extension to file its estate tax return. The estate failed to meet the deadline because of delayed litigation, attributed to health conditions of the executor and an estate attorney’s cancer diagnosis. The estate filed its return nine months late, and was found to have overpaid by $941,000. The IRS imposed a $450,000 penalty for the late filing. After deducting the penalty from the amount due to the estate, the IRS refunded the balance of $491,000 to the estate, denying the remaining claim. The estate then filed a refund action in federal court.
The court determined that the IRS was incorrect in its calculation and assessment of penalties, and that it had wrongly interpreted § 6651(a)(1). The court, then, examined the issue of whether the taxpayer demonstrated reasonable cause for its late filing. The court cited § 6651(a), stating that:
no penalty for the failure to timely file a tax return may be assessed if ‘it is shown that such failure is due to reasonable cause and not due to willful neglect.’
The court determined that the estate had demonstrated reasonable cause because of the delayed will contest litigation due to the executor’s health condition; an estate attorney’s cancer diagnosis, as well as the prestige of that attorney’s firm; and the length of time and difficulty of having the farm appraised.
The court’s determination that penalties should not apply because reasonable cause existed for the late filing demonstrates that there are situations in which a taxpayer may be able avoid the penalties for late tax filings and other IRS penalties. Taxpayers facing IRS penalties should consult a qualified tax attorney to determine whether they may have defenses to remove those penalties. At Freeman Law, our attorneys know the system and aggressively push back on IRS penalties through administrative and judicial proceedings, seeking the most efficient and effective routes to fight IRS penalties.
For more on IRS penalties, see our prior posts: A Primer on IRS Penalties and Litigating IRS Penalties.
Need assistance in managing the Tax Compliance process? With our unique substantive and procedural knowledge, we can provide a comprehensive approach to the tax dispute resolution process, often collaborating with clients’ existing tax professionals to formulate creative solutions to the most complex tax problems. Freeman Law offers value-driven legal services and provides practical solutions to complex tax issues. Schedule a consultation now or call (214) 984-3000 to discuss your tax concerns and questions.
