IRS Abused Discretion By Failing to Allow Estate to File for Extension After Due Date of Estate Tax Return

In the case of the Estate of Proske v. United States, (US District Court New Jersey, Docket No. 2:09-00670), an estate was granted a refund of late filing penalties, the Court finding that the IRS had abused its discretion in denying the estate’s request for an extension of time to file the return, even though that request was filed after the due date for the return in question.

Normally an estate would request an extension of time to file a tax return under the automatic provisions of Reg. §20.6081-1(b).  That requires filing a Form 4768 on or before the original due date for filing the Form 706.  The estate in this case did not do so.  However, Reg. §20.6081-1(c) the IRS may, upon a showing of good and sufficient cause, grant an extension of time to file the estate tax return.

In this case, the estate claimed it was unable to timely file an extension for a number of reasons.  Just over a month after the unextended due date had passed, the estate did file a request for extension along with a payment of $1.8 million in estimated taxes, along with a detailed explanation of why it believed the estate should qualify for an extension under Reg. §20.6018-1(c).

The IRS originally denied the extension, simply noting that it was filed after the due date for the return.  The IRS was unable to produce any evidence to indicate why the IRS examiner that handled the extension request had deemed there not to be good and sufficient cause for the late extension request, or even that he had considered anything except the date the request was filed.  Thus the Court found the IRS had abused its discretion (or, effectively, simply ignored Reg. §20.6081-1(c)’s existence).

But the estate still needed to actually have good and sufficient cause, so the Court turned to the estate’s reasons.  The Court found that the taxpayer was required to both estimate the tax due and must have a sufficient basis for the amounts it includes on the form, seeming to find the latter largely from testimony of the IRS examining agent that if an extension was filed without sufficient knowledge of the truth of the information in the request, it could result in prosecution for perjury.  Thus, the Court found, given the facts of this case, the estate had good and sufficient cause to delay requesting the extension until such time as it could meet the second prong of that test, something it was unable to do at the due date due to disputes among the heirs.

Note that it is likely another court would be less apt to have found the taxpayer was unable to estimate a proper tax under these facts—the IRS examiner’s musing on possible perjury charges was likely a major factor here in the taxpayer’s success in this case.

But the existence of the “second chance” option for estate tax returns in Reg. §20.6081-1(c) (an option not available for most other extensions under §6081) must be remembered if a practitioner is faced with estate that has failed to timely file for an extension for the estate tax return.

Advertisement