Surviving Section 6651 of the Internal Revenue Code
| Publication year | 1982 |
| Pages | 2576 |
| Citation | Vol. 11 No. 10 Pg. 2576 |
1982, October, Pg. 2576. Surviving Section 6651 of the Internal Revenue Code
A former colleague with the Estate and Gift Tax Group of the Internal Revenue Service ("IRS") aptly likened the practice of law to trying to lead one's client and oneself through a mine field without getting blown up. Since 1976, the practice of federal estate and gift tax law has become an especially fertile ground for legal "mines." With major changes in the law made on a seemingly weekly basis, getting a Form 706 tax return through that "field" is a risky proposition at best. The purpose of this article is to try to create an awareness of what is happening in one of the major trouble areas---IRC § 6651---the imposition of penalties for late filing and payment of estate taxes.
The attorney confronted with an issue involving penalties in an estate tax matter is not to be envied. On one hand, he is faced with an unhappy client who has quickly learned that being appointed a personal representative involves far more than a mere honor and, on the other hand, he is faced with the IRS, better armed than ever with case law favoring the imposition of penalties. What makes the matter worse is a growing reluctance of courts to go along with an attorney's mea culpa, which resulted in no liability if the attorney was able to convince the court that the late filing was entirely due to his negligence.
The filing due date of IRC § 6075(a) is as follows:
Returns made under section 6018(a) [relating to estate taxes] shall be filed within 9 months after the date of decedent's death.(fn1)
This nine-month period expires on the later date numerically corresponding to the date of death or, if there is no such date, on the last date of the appropriate month.(fn2)
Extensions to the due date comes under IRC § 6081 (a)---General Rule:
The Secretary may grant a reasonable extension of time for filing any return, declaration, statement or other document required by this title or by regulations. Except in the case of taxpayers who are abroad, no such extension shall be for more than 6 months.(fn3)
Section 6651(a)(1) imposes a penalty of 5 percent per month (or fraction thereof) up to 25 percent of the amount of tax due and § 6651(a)(2) imposes a penalty of one-half percent per month of the tax due but not timely paid up to 25 percent. Even though these penalties are separate and distinct, the failure to file penalty is reduced to 4 1/2 percent per month if a failure to pay penalty is also in effect for the same period.(fn4) This reduces the combined cumulative effect of both penalties to 47.5 percent of the total tax---a very large "minefield" indeed! Both IRC § 6651(a)(1) and (2) provide for an excuse from penalty imposition where "it is shown that such failure is due to reasonable cause and not due to willful neglect."(fn5)
The IRS view of reasonable cause is set out in Treas. Reg. § 301.6651-l-(c), which provides that the personal representative must show that he exercised "ordinary business care and prudence" and was "nevertheless unable to file the return within the prescribed period." The burden of proof is on the taxpayer to show reasonable cause,(fn6) and it must be shown by a preponderance of the evidence.(fn7)
Given this statutory scheme, it may be helpful to review the route taken by a late-filed Form 706 estate tax return. The return is ordinarily required to be filed in the same IRS Service Center as used by the decedent before his death.(fn8) The initial reviews of the tax computation and filing requirements are made by processing personnel. One of these reviews involves a check of the due date against the date the return was actually or constructively received by the IRS.(fn9) This is considered a ministerial review and not an inquiry into substantive issues. As such, if the return is filed late, penalties are automatically assessed by processing personnel.
If the taxpayer has shown no reason for late filing and/or late payment, the penalties are simply...
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