Failure to File Penalties Upheld Against a Corporate Taxpayer

Posted on May 06, 2019

In a recent case, a corporation learned that it did not file its federal Form 941 employment tax returns for 2010 through 2013 or paid the related liability. The corporation said that it first learned of this issue when it began receiving IRS notices. In response, the corporation paid over $250,000.00 in employment taxes to the IRS along with penalties and interest. During its investigation of this problem, the corporation found that its operations manager failed to pay the corporation’s taxes or to file the related tax returns. The operations manager missed the tax return filing deadlines and did not inform the corporation’s owner of the problem or tell the owner about the numerous IRS delinquency notices he had received. The corporation sought a refund of penalties and interest, some of which was granted, but most of which was denied. The corporation then filed suit against the IRS seeking the remaining refunds. The court held that the corporation’s reliance on its operations manager cannot constitute reasonable cause for failing to file the tax returns or paying the tax. In order to avoid penalties, a taxpayer must prove that the failure did not result from willful neglect and that the failure was due to reasonable cause. In this case, the court pointed out that the operations manager did not require any special training or effort to ascertain the tax return filing deadline and to make sure that it was met. The failure to timely file a tax return is not excused by the taxpayer’s reliance on an agent which, in this case, was the operations manager. The court held in favor of the IRS. What do you think?