Acceptable and Unacceptable Excuses for Late Filing

By: A.J. Cook

The Internal Revenue Service has some advice for taxpayers planning to file their returns late: Don't!

There are only a few acceptable excuses; the courts usually side with the tax collector. The list includes:

Death or serious illness of taxpayer or immediate family.
Unavoidable absence of the taxpayer.
Destruction or loss of taxpayer's records by flood, fire or other calamity.
Inaccurate advice from a competent advisor that a return is not required.
Unavailability of IRS help to prepare a return.

If you have a question about your return, pay an estimate of taxes due and request an extension, rather than send nothing. It is better to have filed a questionable return than never file at all.

Juan Ruiz of Woodburn, Ore., worked long hours operating his three Mexican restaurants. When his return didn't arrive on time, the IRS assessed a penalty.

Ruiz appealed to the Tax Court. He explained that after his preparer gave him the return, he put it in his briefcase and then -- just forgot it.

The court let the penalty stand to serve as a reminder to Ruiz.

The Moral: If you forget, don't expect IRS to forgive.

When taxpayers spin their stories of woe explaining a late return, IRS agents always ask: Was the return filed within a reasonable time after the illness or other delaying event?

William and Joan Judge of Milwaukee claimed that a series of misadventures caused them to file late. They filed their 1971 - 1976 returns in 1980 and their 1978 return in 1982. They never filed their 1977 return.

When challenged by the IRS, the Judges went to court. They enumerated their difficulties:

Their accountant suffered personal problems.
William had coronary bypass surgery in 1976 and took antidepressant drugs for a year.
The IRS's criminal investigation of the Judges, though dropped after two years, slowed things down.

The courtroom judge said William was well enough to conduct normal business, and the couple followed a pattern of late filing.

The Moral: Whatever his trials and tribulations, a tardy taxpayer is unlikely to find a sympathetic judge.

Your return or an extension better be at the Internal Revenue Service, or you'd better have an acceptable excuse.

Levine and his brother owned and operated a maze of businesses: toy and plastic manufacturing plants, chemical, metallizing and fire extinguisher companies. Delegation of duties enabled the two executives to control the conglomerate.

On March 19, Levine's accountant mailed the return to Harry and his wife, Leona. They signed it and gave it to Edward W. Carlson, assistant treasurer of the companies. Carlson also handled the owners' personal financial matters. He put the return in his follow-up file -- and there he discovered it on May 12. Concerned that it was already late, he immediately gave the return to his secretary to send via registered mail. She stamped it with a postage meter and placed it on top of the machine for the mail pickup, the usual mailing procedure. On June 27, while cleaning the office, a janitor discovered the return behind the postage meter. It was immediately mailed.

When the IRS assessed a late penalty, Levine went to court. In a fair but surprising decision, the judge ruled the Levines owed no penalty. He said Levine relied upon people and procedures previously successful in filing returns timely. The court noted that Levine's employees corrected the problems as soon as discovered.

The Moral: The road to good excuses is paved with good intentions -- and usually reliable people.

Attorney Murry Bogatin of Sayville, N.Y., was suspended from law practice. In a race to finish his cases before the suspension took effect, he postponed filing his return.

The IRS charged a late filing penalty. In court the judge said Bogatin had his priorities wrong. When he rushed to complete his legal work, he should have rushed to file his return, also. No one is too busy, the judge added, to hire a return preparer or to file an extension request.

If the IRS hits you with a late filing penalty, should you pay it? Consider this:

The IRS admits that it assesses 1.4 million penalties each year erroneously. Either the taxman was wrong, or the taxpayer had a good excuse. This number would be much larger if it included erroneous penalties that go unchallenged.

THE PLANNING TIP: Challenge late filing penalties if you have an acceptable excuse. Sometime winning explanations include: the IRS gave you incorrect advice; you were unable to get needed records; your normally reliable tax advisor said you didn't have to file; a casualty destroyed tax records or otherwise prevented your filing; or you or an immediate family member died or became seriously ill.

Losing excuses include: lack of money; your accountant's poor health; inability to understand tax laws; belief that you don't owe taxes; unresolved issues with the IRS on another matter; or -- as in the Bogatin case -- you were very busy.

The winner for the best -- but still not acceptable -- excuse for failing to file an income tax return on time goes to Douglas D. Kemmerer.

In college Kemmerer studied engineering, general business and economics. He worked as a vice president at an energy resource company, a securities firm and a real estate company in New York.

At each job, he spent a lot of time working, almost seven days a week from 7:00 a.m. to 9:00 p.m. But he spent no time worrying about taxes. He didn't file returns for 10 years -- He didn't even sign the tax forms his wife prepared after he was married.

But, the IRS caught up with him. His excuse: He had tax phobia. Kemmerer even found a psychiatrist Dr. who agreed.

In court, the judge allowed the IRS penalties to stand. He was skeptical that the executive suffered tax phobia for 10 years. He also doubted the genuineness of the disease noting that Kemmerer consulted the doctor only once -- a month before the trial.

The Moral: It's not all in your head -- tax pain is in your wallet. Or, the IRS cure for tax phobia -- take penalties and interest, and call your lawyer in the morning.

The runner-up in the competition for best (but still not acceptable) excuse are Dr. Clarence Williams and his wife, Samaria, of Flint, Mich.

Dr. and Mrs. Williams explained to an inquisitive IRS that the couple couldn't find a suitable tax return preparer. Even though the one they used, when they filed their return nine months late, was the same one they had used for the previous two years.

The appeal of the IRS penalties was unsuccessful. The principal for the accounting firm used by the Williamses gave some insight into the cause for the delay: They were not always cooperative. Things got so bad "on several occasions we asked them to leave."

Phnina Lattman didn't stop with one excuse. She gave the judge three. Lattman, owner and operator of gasoline service stations in Albany, N.Y., was robbed of money and some tax records. She requested, and received, extension after extension. Finally, the IRS would grant no more. She filed after the last extension expired, which was eight months after the initial due date. On appeal the judge agreed with the agency's penalty.

THE PLANNING TIP: Following are eight reasons for late filing the IRS says it will accept:

This is not an all inclusive list. The IRS and the courts accept other excuses for filing late. An important point, often overlooked, even though you have a valid excuse, file as soon as possible after the impediment is removed.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.