Is There a Downside Risk to E-Filing Your Taxes?

Overview

The popularity of e-filing taxes has now increased to the extent that more than 90 percent of all individual income tax returns are filed electronically.  The vast majority of taxpayers that e-file find the process a simple and convenient way to file and, if a refund is due, a faster way to obtain it.  But, is there any downside to e-filing?  A recent federal case from California indicates that if a taxpayer isn’t diligent a big problem could arise.

The potential peril of e-filing – that’s the topic of today’s post.

California Case

In Spottiswood v. United States, No. 17-cv-00209-MEJ, 2018 U.S. Dist. LEXIS 69064 (N.D. Cal. Apr 24, 2018), the plaintiff electronically filed a joint return for the 2012 tax year via TurboTax software on April 12, 2013.  The return contained an erroneous Social Security number for a dependent. The same day, the IRS rejected the return because the Social Security number and last name did not match IRS records. Later that same day, TurboTax sent the plaintiff an email notifying him that the return had been rejected due to the mismatch of the name and Social Security number for the dependent.

The email notification of the rejected return is exactly how the system is supposed to work.  However, the plaintiff failed to check his email account and, hence, did not learn of the e-file status of the return until about 18 months later. Consequently, the IRS assessed late payment and late filing penalties.

The plaintiff filed the 2012 return on January 7, 2015 and paid the $395,619 tax liability in full. On February 16, 2015, the IRS assessed a late filing penalty of $89,014.27 and a late payment penalty of $41,539.99 plus interest of $26,216.81 on the late payment. The plaintiff paid the interest, but not the penalties. On April 27, 2015, the plaintiff submitted a statement to the IRS noting that had he realized that the return had not been accepted he could have paper filed the return on a timely basis. The plaintiff also conceded that he didn’t read the “fine print” of the tax software agreement that “may have” notified him that he needed to log back in to ensure that the return was accepted. The plaintiff, in August of 2016, filed a request via Form 843 for abatement of the penalties for late filing and late payment, and lied that the 2012 return had been electronically filed via TurboTax without issue. The plaintiff filed suit challenging the assessment of the penalties.

At trial, the plaintiff conceded the late payment penalty (and associated interest) but challenged the other penalties and interest assessed. The plaintiff claimed that the document filed should have been accepted as a “return” and should not have been rejected. The plaintiff claimed that the return met all of the requirements of Beard v. Comr., 82 T.C. 766 (1984) because it was sufficient to calculate the tax liability; purported to be a return; was an honest and reasonable attempt to satisfy the requirements of the tax law; and was executed under the penalty of perjury. The plaintiff also pointed out that the IRS would have accepted the return had it been paper-filed, citing the Internal Revenue Manual (IRM).

Unfortunately for the plaintiff, the trial court determined that the plaintiff had not properly established a foundation for the IRM, and did not create a triable issue of fact as to whether the same mistake on a paper-filed return would have been accepted by the IRS. Accordingly, the court held that the return, as filed, did not allow the IRS to compute the plaintiff’s tax liability (without providing any explanation of how a Social Security number mismatch had anything to do with computing tax liability) and granted the government’s motion for summary judgment. 

Conclusion

While e-filing a return can be a desirable method for filing a return it is imperative to ensure that the IRS has accepted the return.  Any type of communication that doesn’t involve direct, face-to-face communication has its drawbacks.  When a return is e-filed, it’s a must to make sure that the return has been accepted.  Diligently checking for an email verification is absolutely essential.  Not doing so could be quite costly.