Is this reasonable cause?

For 2016 tax year, I wrote my client an email in April 2017 that said his extension form 4868 was in our shared dropbox folder. I said all he had to do was write in the amount he wished to pay and mail it by the deadline with a check. This is how he asked me to do it for both 2014 and 2015 tax years because he wanted to make a last minute decision on how much to pay.

The client responded to my email, so I know he saw it, but didn't give a clear confirmation that he would mail it. I efiled the return in Sept and very quickly he got a failure to file penalty of $7k based on unpaid balance of $30k. Unfortunately for him he has had penalties every single year dating back to at least 2011 so the first time penalty abatement is off the table.

I have had conversations with him about all sorts of reasons why he might be able to claim reasonable cause but there is nothing there. It's simply a case of him not mailing in the extension because as he told me later, he thought I was efiling it. I know relying on bad advice from the IRS or a CPA can be used, but should I advise my client to use miscommunication as an attempt at reasonable cause? $7k is a lot of money, but somehow I feel I'm throwing myself under the bus advising him to do this.

I feel for you but you were aware that this client has a history dating back to 2011 with penalties. I had one client who files an extension every year for one reason or other and i have taken the position (communicated in writing), that if he wants me to file an extension he MUST pay at least the previous year's tax liability either by check (mailed from my office after he writes it), or direct pay. This client had a history of blaming someone else for his tax problems.

This year, his wife informed me that she had arranged for another preparer to file their extension, after I called to remind them. Good riddance!

Do you want IRS to come down on you for this loser?

For 2016 tax year, I wrote my client an email in April 2017 that said his extension form 4868 was in our shared dropbox folder. I said all he had to do was write in the amount he wished to pay and mail it by the deadline with a check. This is how he asked me to do it for both 2014 and 2015 tax years because he wanted to make a last minute decision on how much to pay.

The client responded to my email, so I know he saw it, but didn't give a clear confirmation that he would mail it. I efiled the return in Sept and very quickly he got a failure to file penalty of $7k based on unpaid balance of $30k. Unfortunately for him he has had penalties every single year dating back to at least 2011 so the first time penalty abatement is off the table.

I have had conversations with him about all sorts of reasons why he might be able to claim reasonable cause but there is nothing there. It's simply a case of him not mailing in the extension because as he told me later, he thought I was efiling it. I know relying on bad advice from the IRS or a CPA can be used, but should I advise my client to use miscommunication as an attempt at reasonable cause? $7k is a lot of money, but somehow I feel I'm throwing myself under the bus advising him to do this.

Don't throw yourself under the bus for him (or anyone else). You have his response, you have proof that you communicated this to him.

This reminds me of something that one of my tax professors said in law school in class one day.

He was talking about Federal criminal tax matters. He said: "There may come a time in your career where either you must go to jail, or your client must go to jail. Make sure that your client is the one who must go to jail."

What he meant was: Don't break any rules for the purpose of shielding your client from the effects of making a very bad decision. If your client insists on making a bad decision, don't engage in behavior to protect the client that ends up making you legally culpable.

I think the philosophy can be expanded to civil tax matters as well, and can be stated as: Don't conflate your client's interest and your own interest. You have no moral or legal duty to suffer for what is entirely your client's mistake.

Do you want IRS to come down on you for this loser?

Exactly. I'm trying to help the client while at the same time not opening up myself to trouble. This by the way is a client who emailed me the day after Trump won the election and asked how his new tax law would help his business. I tried very nicely to explain that there were no laws yet and thought maybe I should send him the classic Schoolhouse Rock "I'm Just A Bill" video.

As others have said, do not throw yourself under the bus. This sounds like a situation where it is best to disengage from rendering services to the client. Hopefully you have file retention/litigation hold should it ever come down to that, but there are just times where a client needs to be fired. I have done it several times because I no longer trusted the clients, or they are simply more of a headache than anything.

I am working with a private foundation that lost their tax exempt status for failure to file for three consecutive years. I do not believe their reasonable cause will stand up with the IRS since they now have to prove it for each of the three years, and I have made sure I have clearly communicated this to the client and I will once again in future e-mails. It is the client's failure to oversee their former CPA and maintain compliance, no one else's. Cross your Ts and dot your Is, and let them go.

Love this: "There may come a time in your career where either you must go to jail, or your client must go to jail. Make sure that your client is the one who must go to jail."

I've always had two rules: #1. Stay out of jail. #2. and in this order: keep the client out of jail.

If you’re so worried about it, can’t you just email your client and say something like: “I’d be glad to write to the IRS and chalk it up to a mis-communication. However, I don’t want that letter to be used against me, so I’ll need you to e-mail me back confirming that this was entirely your fault, seeing that I gave you a clear instruction to mail in the extension prior to the deadline.”

And by the way, it’s shocking that you would file a return in this instance without first confirming that the extension was timely filed.

I don’t think you have reasonable cause even with the miscommunication. FWIW.

But tell the client you’ll write the letter then throw the irs under the bus when they deny it. You never know.

And by the way, it’s shocking that you would file a return in this instance without first confirming that the extension was timely filed.

Not shocking to me. So the tax preparer finds out an extension was not filed, that does not change anything and the penalty will still be assessed. The only advantage is that it will be known sooner that a penalty will be assessed.

By the way, we efile all extensions, even if we mail the extension (i.e. it is simply a payment voucher so the tax is properly credited to the correct account) to the client for payment. There is no benefit in only having the client mail the extension. Even if the efile extension has a difference amount due than the client pays, there is no harm.

By the way, we efile all extensions, even if we mail the extension (i.e. it is simply a payment voucher so the tax is properly credited to the correct account) to the client for payment. There is no benefit in only having the client mail the extension. Even if the efile extension has a difference amount due than the client pays, there is no harm.

This is a good idea and one I will implement. I only have about two clients who still want to paper file as they are paranoid of ACH debits so they like writing checks and therefore ask for the paper form.

However remote the possibility of prevailing, there is nothing to lose by seeking abatement for reasonable cause - miscommunication.

However remote the possibility of prevailing, there is nothing to lose by seeking abatement for reasonable cause - miscommunication.

I'm worried that somehow my name gets added to some dreaded "review all their tax returns" list.

No such thing on this. Relax.

My process is that I tell clients often and early that I don't file extensions unless they ask. For a few good, long-time clients, I'll ask them and get the ok. Always efiled. I've fired all the old scaredy cat folk. I have a couple clients who do file their own, so I have to make sure before I do. After that, not my problem. We file and wait for mail.

First, there is NO need to send money with an extension so I see absolutely no reason why any practitioner would send the 4868 to the client.

Second, as I deal with delinquent clients and only file returns for a few continuing clients, I routinely file extensions for those I am certain will be late and simply inform the clients that I have done so. My job is to protect the interests of my clients and that's what I do.

Third, there is no good reason for a tax professional not to file extensions electronically.

The only advantage is that it will be known sooner that a penalty will be assessed.

That’s one advantage. And if you know about it in advance, you can perhaps expedite the preparation of the return to mitigate the damage. Another advantage is that the client can be warned in advance that an IRS notice will be forthcoming. This way, they won’t freak out when they get it in the mail. A third advantage is that if the p&i is minimal, you just compute it and pay it with the return so you don’t have to deal with future IRS correspondence, back and forth with the client, etc. Another advantage is that if the client was planning on making a SEP contribution, for his Schedule C business, prior to the extended due date, you will not take that deduction on the 1040 since you knew the return wasn’t extended prior to filing it. And if you do take that deduction, because you didn’t confirm the extension was filed, you will have to later amend that return since you didn’t confirm the extension was filed. And you might also have to withdraw the contribution, depending on the facts. You might also think twice about some tax election you were planning on including with the return, which wouldn’t be valid, seeing that the return wasn’t properly extended.

By the way, we e-file all extensions

That kind of proves my point. Seems to me, you want to know if an extension was filed.

I am not an attorney but having dealt with attorneys, I feel the more OP communicates to come up with reasons to abate the penalty because of "miscommunication" the more he is likely to get in hot water if the taxpayer decides to sue or IRS decides to take a closer look.

In my opinion the best course of action is to disengage!

Disengage? Why? That's de facto telling the taxpayer that you made an error. A client is far less likely to take action against someone working for them than someone that quits their case.

he wanted to make a last minute decision on how much to pay.

he got a failure to file penalty of $7k based on unpaid balance of $30k. Unfortunately for him he has had penalties every single year dating back to at least 2011

It's simply a case of him not mailing in the extension because as he told me later, he thought I was efiling it.

No, it's not "simply a case of" that at all.

No one has mentioned how not filing the extension is not the problem here. (Yes, extensions are important for making certain elections or plan contributions, but apparently that is not involved).

The problem is that he knew $30K was due by mid-April and he deliberately declined to pay or even inquire if he thought you were scheduling the payment for him (not to mention you would need his signature on Form 8878 to schedule payment for him). This appears to be normal for him. At worst, he should have noticed within a week or two that there was no $30K dent in his checking account, making him liable at most for one month of FTF/FTP. If he had simply made the payment on time, there would be no penalties, regardless of extension filing.

Instead of deporting folks who choose not to stand for the national anthem (something our leaders favor, per today's news headlines), maybe we should start deporting people who routinely violate the law by not paying their taxes on time. Which one does more harm to America?

Makbo, that's silly. Don't know about your clients, but I have to laugh. My clients are my clients because they don't file and they don't pay. They are not the problem and the tax gap is NOT from them. They eventually get into compliance.

Don't know if this is the norm for BTS's clients or if this is an anomaly, but since the client had penalties every year since 2011, this issue should have been anticipated.

The greater harm to America is the Executive and Legislative Branches not giving IRS the proper resources to do the job.