Shaun Maritn, in his blog entitled California Appellate Report (which I read regularly and enjoy), posts a recent Ninth Circuit Appellate Court decision penned by District Judge Timothy M. Burgess, sitting by designation with the Ninth Circuit Court of Appeals.

The case, entitled Baccei vs. United States, revolves around a request for extension of time to file an Estate Tax return and pay the dreaded Estate Tax (Form 4768).  Apparently, in Baccei, the taxpayer’s CPA filed his request for an extension of time to file a return and pay the tax.  Both the return and tax payment are due nine (9) months after the decedent’s death.  An extension of time to file an Estate Tax return six (6) months is almost always granted as a matter of course upon filing a request on Form 4768—easy.  An extension of time to pay the estimated Estate Tax is not so easily obtained.  The Government will wait for the paperwork, but not the money.  A sufficient explanation must be made before the IRS grants an extension of time to pay Estate Tax.

Unfortunately for Mr. Baccei, his CPA filled out Part II of Form 4768 requesting an extension of time to file, but did not complete Part III requesting an extension of time to pay.  As a result, the IRS imposed penalties and interest for late payment.  And since the tax came to over $1 million, the penalty was $58,954 and the interest came to $69,801, for a total hit of $128,755—all for not checking a box on Form 4768.

The taxpayer argued that he had substantially complied with the form by filing the form in the first place and completing the entire form other than Part III.  The taxpayer also argued it would be unfair to impose a penalty and that the taxpayer had “reasonable cause” to ask that the penalty and interest be abated given his reliance on the CPA to file the form properly.

The IRS disagreed with the taxpayer, the Federal District Court disagreed with the taxpayer and the Ninth Circuit Court of Appeals did the same.  Taxpayer loses for failure of his CPA to check a box on a tax form.  Shaun Martin in his blog post stated “this couldn’t be more right.”  I have to strongly disagree.  This couldn’t be more disturbing.  You don’t have to be a tax expert to know that tax forms are confusing!  Even the so-called “simplified” forms leave one puzzled at times.  And I speak from experience, having filed a good number of Estate Tax Returns and requests for extensions of time to file and pay in my career.

Luckily, I have never forgotten to request an extension of time to pay when one was required, but I can see how it could be done.  Quit easily in fact.  Primarily because payment is typically made at nine months and only the time to file is extended.  It’s true that the CPA should have filed the form correctly, but we all make mistakes (even the IRS).  What purpose is served by forcing a taxpayer to pay a hefty penalty when his CPA missed that portion of the form? 

Judge Burgess states that the unchecked box was essential to request an extension of time to pay even though the CPA’s cover letter to the IRS specifically stated that they were asking for an extension of time to pay.  While IRS forms should not be disregarded, failing to fill in all of the particulars should not lead to such a harsh and draconian penalty in every case—especially where a tax professional was retained on behalf of Mr. Baccei to file the form in the first place.  The Court reasoned that Mr. Baccei should have made certain the form was prepared correctly, but who would look over a form their CPA prepared?

The end result is that this particular decedent paid his share of Estate Tax and then some.  I don’t think the decedent would think this “couldn’t be more right.”  Apparently tax form technicalities can cost a decedent’s estate a bundle.  The lesson being that we must all submit perfectly completed tax form every time, no exceptions.  But does this “perfection” requirement equally apply to the IRS?  Hard to imagine it does.