Can a client rely on his preparer to file an extension?

• Author: Goca, Neil P., III

Who is ultimately responsible for filing extension requests for clients' tax returns, and what kind of liability do accountants have by not filing these extension requests? This issue was raised in the recent case of McMahan, 2d Cir., 5/23/97.

The taxpayer, a lawyer and partner in a law firm, relied on his business partner, an attorney with tax expertise who had prepared the taxpayer's return in prior years and who had filed for the taxpayer's automatic extension, to file an additional extension of time to file his individual return. Both the taxpayer and the taxpayer's assistant reminded the business partner several times about the approaching deadline and filing of the extension request. (The taxpayer knew that this additional extension request was not automatic.) The business partner assured the two that the second extension request had been filed, when in fact it had not. The taxpayer was subsequently assessed with late filing penalties of $141,000 under Sec. 6651. The taxpayer claimed that the late filing penalties should not be assessed based on reasonable cause. Regs. Sec. 301.6651-1(c)(1) defines reasonable cause as the inability to timely file a tax return, provided the taxpayer exercised ordinary business care and prudence. The taxpayer claimed that his reliance on his business partner to file the extension constituted the exercise of due care. The court disagreed. The court ruled that it is the taxpayer, and not the taxpayer's tax practitioner, who is responsible for ensuring that all appropriate tax forms, including extension requests, are filed. The court distinguished the act of filing an extension form, which requires no special training or knowledge, from reliance on a practitioner for substantive tax advice. In issuing this ruling, the court relied on Boyle, 469 US 241 (1985), in which the Supreme Court ruled that a taxpayer cannot avoid a penalty by relying on an adviser to file a return. This reliance could be relevant in situations in which there is a question of substantive law; even in that situation, however, the...