As I previously described, in Part 1, under the Delinquent Filing Procedures, a taxpayer with unreported foreign accounts or assets can file the foreign reports late without any penalty. In order to qualify for that treatment, the taxpayer must have had reasonable cause, based on the standards for reasonable cause in various Code provisions and regulations. The recent cases of Willett v. U.S. and Hunter Maint. & Leasing Corp. v. U.S. shine additional light on the reasonable cause standard, which affects how a taxpayer might analyze their suitability for the Delinquent Filing Procedures.
In Willett v. U.S., the taxpayer hired a CPA to file the taxpayer’s return and gave the CPA all of the taxpayers tax information for the year. The CPA became ill, but assured the taxpayer the CPA would file the return. The CPA did not file the return, and subsequently died. The taxpayer then filed the return late and was assessed a late filing penalty. The taxpayer argued the penalty should not apply, because the taxpayer had reasonable cause for failing to file–reliance on the CPA’s assurances. The Court noted that reasonable cause requires ordinary care, and the taxpayer, short of showing they had attempted to contact the CPA, did not exercise ordinary care by waiting too long to change professionals and file the return.
In Hunter Maint. & Leasing Corp. v. U.S., the taxpayer, an S corporation, failed to file four years’ of returns on time and was assessed penalties for failure to file. The corporation had hired an accountant as CFO, who was responsible for preparing and filing the corporate returns. The CFO was suffering from cancer and eventually died, leaving prepared but un-filed returns behind. The Court noted the rule from the Broyle case that a taxpayer cannot use reliance on an agent as reasonable cause for failure to meet a clear statutory obligation. This rule would not apply if the taxpayer itself had an inability to perform the required act (like preparing and filing the return), and thus had to rely on an agent. The Court concluded that the taxpayer had not shown reasonable cause because the CFO’s illness alone was not sufficient when the President and board of the corporation were able to act to have the corporation take appropriate action.
Willet and Hunter Maintenance & Leasing illustrate that the threshold for qualifying for the Delinquent Filing Procedures can be high. Whether a taxpayer meets the reasonable cause standard is a very facts and circumstances dependent analysis. The cases also highlight that mere reliance on an agent (such as a CPA or other professional) will not usually meet the reasonable cause standard. This reality makes the Delinquent Filing Procedures, though taxpayer favorable, limited in their usefulness.