A CPA firm that failed to use certified or registered mailing to provide proof of filing of a taxpayer’s extension for a 2004 Form 1040 proved costly. In the case of Tesoriero v. Commissioner, TC Memo 2012-261, the Tax Court held the taxpayer was liable for the failure to file penalty when the IRS argued that they had no record of receiving an extension request for the taxpayer.
IRC §7502 provides the “timely mailing” exception to the general requirement that the IRS must receive various filings on or before the date prescribed by law. IRC §7502(a) provides, in part, that “the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment…”
The problem arises if the IRS has no record of the mailed document having actually been received by the Service. In that case, no receipt by the IRS means there’s no postmark available to be examined. IRC §7502(c) provides an option for a taxpayer to avoid having to be concerned with the risk that the IRS may argue it has no record of the filing. IRC §7502(c)(1) provides that if a taxpayer files the form using registered mail, the registration provides prima facia proof of such timely filing.
IRC §7502(c)(2) goes on to provide that the IRS may provide for regulations that describe the circumstances under which certified mail and electronic filing will be granted the same status as registered mailing. Similarly, IRC §7502(f) provides that the IRS can designate private delivery services that will also be granted such treatment. The IRS has provided the necessary supporting guidance to enable all of these options.
In the case at hand the taxpayer had relied upon the CPA firm to file the extension each year. The firm prepared a Form 4868 for the taxpayer to extend the time for filing the taxpayer’s 2004 income tax return. The form showed an estimated tax liability that was simply the total of the taxpayer’s estimated tax payments for the year. The CPA did not ask the client what he believed his 2004 tax would be or make any adjustments for wage income or withholding.
In line with the firm’s office procedures, the CPA in charge of the return reviewed the Form 4868 and placed it on top of an envelope in which all client extensions would be sent to the IRS for that year. The secretary would eventually seal the envelope and affix postage using a postage meter, and then take the mail downstairs to the mailbox. While the CPA did not mail the return, he did supervise the secretary and insured the envelope was actually taken to the mailbox. The court noted the firm did not keep records of mailing, nor did it maintain postage meter logs.
The taxpayer filed his return in August of 2005, within the applicable extension period. Eventually the IRS examined the taxpayer’s return and assessed additional tax based on disallowance of various deductions and inclusion of additional income. While the case does not specifically indicate this to be the fact, it appears the return actually filed in August 2005 either did not show tax due or the IRS did not assert the penalty on that return.
The taxpayer and IRS agreed on the tax due and the imposition of accuracy related penalties. However, the taxpayer argued that he should not be charged with the late filing penalty. First, his CPA had prepared and placed in the mail an extension request for his return, a fact the CPA testified to at trial. No one was suggesting that, in fact, the CPA was being dishonest about having prepared an extension and even sent the secretary to place the envelope in the mailbox.
Second, even if the CPA had fouled up by not using certified mail, the taxpayer argued he had reasonably relied upon the CPA’s advice that his return was due by the extended due date.
The Tax Court noted that this case was appealable to the Second Circuit Court of Appeals. While the Court had ruled in Estate of Wood v. Commissioner, 92 T.C. 793, (1989), aff’d, 909 F.2d 1155 (8th Cir. 1990) that in certain circumstances a taxpayer could prove filing by means other than using the certified/registered mail options, the Second Circuit had ruled that it read the law to not allow the use of such extrinsic evidence and did not follow Wood. Thus, under the Golsen rule, the Court was bound to rule that the extension was not timely filed if the taxpayer failed to meet the requirements of IRC §7502(c).
The Court also noted that while a taxpayer may have reasonable cause for late filing if the taxpayer was improperly advised of the due date for a filing by a competent tax adviser, that wasn’t the case here. Rather, the taxpayer had relied upon the adviser to file an extension request by the due date of the return. A taxpayer cannot delegate to an agent the responsibility to timely file a return, and that includes an extension request.
While the Tax Court in this case mentioned the possibility that had the case not been appealable to the Second Circuit extrinsic evidence may have been used to prove mailing, regulation changes effective since 2004 render that option unavailable to all taxpayers. Reg. §301.7502-1 was amended by TD 9543 on August 23, 2011 and now provides that only the specifically “blessed” methods of proving timely filing can be used to invoke the “timely mailing is timely filing” rule, thus applying the Second Circuit’s rule across the country.
Similarly, the Tax Court included many additional facts about the CPA’s practice in preparing the extension beyond the facts actually used to decide the case—which was that he failed to use certified or registered mail. While such facts did not technically have an influence in the result as the court decided the case, it is very possible the Court may have ruled against the taxpayer even if the Second Circuit precedent hadn’t sealed the taxpayer’s fate.
First, the CPA’s “proof” of mailing was nowhere near the level of proof that has been accepted in Wood and similar cases. Generally in those cases the taxpayer must show that a United States Postal Service postmark was actually applied prior to the time of filing by a USPS employee. In this case the CPA had not actually delivered the envelope to a Postal Service employee, had not seen an employee apply such a postmark nor had any such employee been made available to testify he/she had applied the postmark and, finally, the CPA had used a postage meter, thus making it almost a certainty that no USPS postmark had been applied.
Second, the Court went on to talk about how the CPA had arrived at the taxpayer’s expected tax liability. Discussion of such facts opens up the question of whether the Court would have been willing to rule that even if it accepted that the form had been timely postmarked, the extension itself was defective because the taxpayer’s liability for 2004 had not actually been properly estimated.
Professionals need to be aware of the need to use a method of filing any document filed on behalf of the client using one of the approved methods. A CPA firm that fails to follow those steps takes on the risk that the document might not make into the IRS system and the potential consequences of such a deemed failure to timely file a document.
Edited to remove erroneous reference to Seventh instead of Second Circuit for controlling precedent in the case.