Taxpayer wins late filing penalty case despite apparent bad facts



Eddie Quigg, CPA, JD

 A recently decided Tax Court case won by the taxpayer shows the wisdom of  the old adage of "you never know until you try." Presented with the facts cited in the case of Ensyc Technologies v. IRS, I wouldn't have given the taxpayer much of a chance at winning this case, but that's why horse races are run and cases are tried. The facts are as follows:

• The taxpayer is an S corporation that manufactures radio frequency identification equipment; operated entirely by its president, who works from his home in Meridian, Idaho;  
• The corporation's tax returns are prepared by an outside accountant and mailed to the taxpayer for signing and mailing to the IRS, with addtional copies provided to the taxpayer for their files--a typical scenario;
• The 2008 return with copies was duly mailed to the president, including copies of Schedules K-1 for the president to distribute to the shareholders;
• The president's files contained a copy of a 2008 Form 1120S with his signature and dated March 16, 2009;
• The IRS has no record of receiving a Form 1120S around that time;
• The IRS did receive a Form 1120S from Ensyc six months later, in an envelope postmarked 9/8/09 but the form itself was dated 2/24/09. The taxpayer contended that the form was intended to be an amended return prepared to reflect the value of Encys's assets, which the bank required before it would make a loan to the taxpayer;
• Believing that the return it received in September was the only return filed for 2008, the IRS assessed a late-filing penalty against the taxpayer of $6,408, which was upheld by IRS Office of Appeals;
• The taxpayer's only argument was that it was not liable for the penalty because it had filed its return timely on its due date of March 16, 2009

In deciding for the taxpayer, the Court first resolved the dispute about whether the president timely mailed the return before its due date in March, 2009, and found that the return was not mailed to the IRS at that time.
The Court then had to decide whether the taxpayer had reasonable cause for not timely filing the return, using the following standard: "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause."
In finding in the taxpayer's favor, the Court stated that the president "usually mailed Ensyc's tax returns on time", and further, that the president had timely signed the return; that he had retained a copy in his files, erroneously thinking he had mailed the original. The Court surmised he had timely mailed the shareholder's K-1s because an Ensyc shareholder had reported the K-1 on his return filed before April 15, 2009.
The Court rejected the IRS argument that the president's testimony was incredilble because he wrote the date February 24, 2009 on the return the IRS received in September. The Court found that the president's explanation for filing the September return was credible, saying that the misdating of the form was not a deliberate attempt to mislead the IRS because "it does not seem likely that [the president] thought that mailing a return in September with a February date would fool the IRS into thinking that he actually mailed the return in February. Although [the president] misdated the September Form 1120S, we believe his testimony that he thought he had mailed the March Form 1120S on March 16,2009."