Substitute Return Penalties Are Valid | Llanos v. Commissioner

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Comedian Jerry Seinfeld one said, “The IRS! They’re like the Mafia, they can take anything they want!” It’s a sentiment probably shared by most U.S. citizens—much to the chagrin of taxpayers. As many now, the Internal Revenue Service is not limited in simply administering the Internal Revenue Code or collecting taxes from individuals. The Service’s power reaches farther than that. Its power also includes filing substitute tax returns on behalf of taxpayers—a veritable correction called upon when a voluntary tax system is not so voluntary. Additionally, the IRS also has the power to assess additions to tax and penalties in various circumstances. As the Ninth Circuit recently affirmed, the IRS has the power to assess such additions to tax and penalties on substitute tax returns it files on behalf of taxpayers.

Section 6651 Penalties, Generally

Generally, the Internal Revenue Service may assess certain additions to tax for failure to file tax returns or failure to pay taxes. Section 6651 prescribes the various situations and penalty amounts that is may assess as follows:

Further, the Internal Revenue Service may assess the penalties noted above on tax returns the IRS files on behalf of a taxpayer. If any person fails to file a required tax return or willfully files a false or fraudulent tax return, the Internal Revenue Service may file a substitute tax return on behalf of the taxpayer.[2] Accordingly, if the IRS files a substitute tax return:

Consequently, for substitute returns filed by the Internal Revenue Service, additions to taxes may be still be assessed with respect to (1) failure to file a tax return, (2) failure to pay the tax owed on the tax return, and/or (3) failure to pay the tax owed that should have been reported on the tax return. However, substituted tax returns should be disregarded for purposes of determining the amount to assess for the failure to file a tax return.[4]

Llanos v. Commissioner

On January 29, 2021, the Ninth Circuit Court of Appeals issued a decision, affirming the U.S. Tax Court’s determination, in part, that the IRS had the power and authority to assess additions to taxes based on the substituted tax return it filed on behalf of the taxpayer.[5] The decision states, in part:

The Tax Court properly upheld the Commissioner’s deficiency determination because the Commissioner presented “some substantive evidence” that Llanos failed to report income, and Llanos did not demonstrate “that the deficiency was arbitrary or erroneous.” Id. at 1004-05. We reject as meritless Llanos’s contention that the Tax Court should have shifted the burden of proof to the Commissioner. See id.; see also 26 U.S.C. § 7491(a) (requirements for shifting burden of proof to Commissioner).

The Tax Court properly upheld the Commissioner’s additions to taxes for Llanos’s failure to file a valid tax return and to pay taxes as set forth in the substitute for return. See 26 U.S.C. §§ 6651(a)(1), (a)(2) (providing for additions to tax where taxpayer fails, without reasonable cause, to file a timely tax return or to pay the taxes due); see also id. § 6020(b)(2) (any substitute for return “made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes”); id.  § 6651(g)(2) (any return made by the Secretary under § 6020(b) “shall be treated as the return filed by the taxpayer for purposes of determining the amount of the addition” under § 6651(a)(2)).[6]


In Llanos, the taxpayer failed to meet his burden of proof (even though he attempted to shift his burden onto the IRS). The taxpayer needed to demonstrate that his tax return deficiency was arbitrary or erroneous to potentially side-step the additions to tax at issue. Each of the penalties described above involve a specific caveat to assessment—”unless it is shown that such failure is due to reasonable cause and not due to willful neglect.”[7] Here, the taxpayer failed to demonstrate an argument for (or evidence of) reasonable cause. Accordingly, the Ninth Circuit affirmed the Tax Court’s decision.

This decision, though not controversial, should be a warning to taxpayers. Failing to file a tax return does not shield an individual from potential assessments or penalties under Section 6651. To be sure, the Internal Revenue Service may ultimately file a substitute tax return, and the taxpayer may be left with additional assessments as a consequence. If taxpayer’s find themselves in this unfortunate situation, they should give the appropriate time and attention to providing evidence of reasonable cause—not necessarily making arguments related to the IRS’s authority to assess penalties.


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[1] See I.R.C. § 6651(a)(1)-(3).

[2] See I.R.C. § 6020(b)(1).

[3] See I.R.C. § 6651(g)(1)-(2).

[4] Id.

[5] Llanos v. Comm’r, No. 20-70360, 2021 WL 306386, at *1 (9th Cir. 2021)

[6] Id.

[7] See generally I.R.C. § 6651(a)(1)-(3).