Individual Income Insights: Better Late Than Never—Late Filing and Payment Penalties


October can be an exciting month. There’s pumpkin spice lattes, haunted houses, Halloween, and (in some states) the final deadline to file your individual income taxes. While most people associate tax season with April, many states offer a six-month extension that brings the final deadline to around mid-October. But what about taxpayers that miss the extension deadline too? More importantly, what if they missed the payment deadline back in April? In short, they better have a good excuse if they want to avoid penalties and related late fees. 

What qualifies as a good excuse depends on the jurisdiction. In general, states categorically waive late fees or grant extensions for taxpayers affected by widespread problems like natural disasters. Recently, states like New Mexico and Virginia have done this for taxpayers affected by Hurricane Harvey and Hurricane Irma. However, it gets more complicated when the reasons vary from person to person. What results is fact-specific cases that can effectively be the taxpayer telling the court their life story for the tax years at issue. States can’t afford to abate every penalty so they set a legal standard for deciding when it is unreasonable to expect a taxpayer to timely file or pay. Because states use different legal standards, taxpayers with similar reasons may not have similar outcomes nationwide.

For example, California’s legal standards focus on causes. Taxpayers must show that their late filing or late payment was “due to reasonable cause and was not due to willful neglect.” Simply claiming your dog ate your tax return is not enough to get a penalty abated.

Jumping to the East Coast, Pennsylvania’s standard focuses less on the event and more on taxpayers themselves. To succeed in their tax courts, you must show you “acted in good faith, without negligence, and with no intent to defraud” the government. So while both states would want to know if you neglectfully left your tax return by the dog bowl, Pennsylvania is less focused than California on what steps you may have taken afterwards to ensure timely filing or payment.

In a 2015 California case, a taxpayer claimed that a “contentious divorce” prevented him from filing on time because his former spouse refused to agree on important tax issues. The court did not find this to be a reasonable cause. They suggested he could have instead filed based on his own income and then filed an amended return after the divorce was finalized. In other words, he should have filed something rather than nothing at all.

But in a 2016 Pennsylvania case, a taxpayer successfully got her late penalties removed by showing she was involved in a “lengthy divorce proceeding” and could not file in time because she was waiting on information from the court appointed accountant. The court found this to be a “unique” situation and granted the abatement.

What about if you have a long history of always filing and paying on time but one year you miss a deadline? You may be in luck if you are filing on the federal level; the IRS sometimes waives penalties for taxpayers who have not received a penalty within the past three years and meet other requirements. However, because California follows a reasonable cause standard, a good record cannot excuse a late payment, as one unlucky taxpayer recently learned in a 2015 case. Conversely, if a court uses a good faith standard, then a bad record may affect the outcome of a case. In Pennsylvania, the court held a taxpayer did not “show a good faith effort” to timely file his 2013 taxes by pointing out he had a long history of late filing and receiving the same penalties.

Can you shift the blame to your accountant? It depends. In United States v. Boyle, the United States Supreme Court held that taxpayers may rely on accountants for “substantive advice” but they cannot rely on them for timely filing. So while you can blame your accountant for giving you misinformation, you can’t blame them for missing a deadline.

A taxpayer in California found this out the hard way. The taxpayer claimed his former accountant held all relevant tax information and it was the taxpayer’s understanding that his taxes were to be filed and paid under an extension. The court denied his claim, finding that issues related to preparing a return are not a reasonable cause for untimely payment. A Pennsylvania taxpayer also found herself faced with penalties due to her accountant. She discovered her accountant was unable to work due to undisclosed problems. The taxpayer hired a new accountant but she still filed and paid her taxes late. Pennsylvania found she acted in good faith and abated the penalties. In another case, Pennsylvania waived penalties for a taxpayer whose accountant filed the return a day late.

In sum, while states may strictly impose penalties for late filing or payments, they also have a lot of flexibility in deciding when to abate penalties. Regardless of which state you live in, the best defense to late penalties is not missing the deadlines.

Continue the discussion on the BBNA State Tax Group on LinkedIn: How should states decide when to abate late payment or late filing penalties?

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