Tax Law Special Report: November 2012
What Excuses Are Good Enough To Avoid Penalties For Filing Your Tax Return Late?

The tax newsletter that I receive every day via email from Thomson Reuters reported recently on an interesting decision from the United States Court of Federal Claims.  It answers the question: if I file a tax return late, what excuses might be good enough to avoid having to pay penalties for the late filing?

In January of 2007, a taxpayer gave gifts of $2 million to each of her daughters. The taxpayer owed approximately $1,800,000 in gift taxes for 2007, largely because of the gifts to her daughters. The taxpayer’s gift tax return and payment were due on Apr. 15, 2008.

During the period between Jan. 1, 2007 and April 15, 2008, the taxpayer did such things as reviewing deeds for transferring real property, visiting notaries, telephoning tax attorneys, and mailing completed documents to her tax attorneys. The taxpayer also reviewed her 2007 federal and state income tax returns and 2008 state estimated tax returns, made out checks, and mailed the checks along with payment vouchers before April 15, 2008.

The taxpayer’s health problems in 2007 included pneumonia, recurrent upper respiratory infections, knee pain, knee replacement surgery, a thyroid growth, heart palpitations and cataract surgery.

In September 2008, about five months after the due date, the taxpayer filed a gift tax return for the gift taxes owed for 2007.  The IRS assessed a penalty and interest for the late filing.  The taxpayer asked for an abatement of the penalty and interest, but the request was denied.

The taxpayer then went to court to try to get a refund of the penalty and interest, claiming that her health problems excused her from timely filing the gift tax return and paying the tax.  The court found that the penalty and interest were proper because the taxpayer’s health problems did not render her continuously incapacitated during the period of time when she should have informed her tax attorneys of her 2007 gifts to her daughters.

The court said, essentially, sorry, but the taxpayer’s reasons for filing late weren’t good enough to avoid penalties because they didn’t render the taxpayer continuously incapacitated during the time when she should have filed her 2007 gift tax return and payment.  The court went further and said that the things the taxpayer was able to do showed that she was only “selectively incapacitated” as to her gift tax obligations. Since the taxpayer did not show reasonable cause under Code Sec. 6651(a) to excuse the late filing, the court dismissed her appeal.

So if you’re going to claim a medical excuse for not filing your tax return on time, you better have been sick enough that you were continuously incapacitated from the time when you first could have filed the return until the date the return was due.  If you were able to do other business, the court probably isn’t going to buy the excuse that you were too sick to file your tax return.

A Little More On The Subject Of Rules To Control Behavior – In Denmark, Lawmakers Concede That A Sin Tax Didn’t Work

My September newsletter on the soft drink serving size restriction in New York City provoked spirited reaction.  I’m happy to be able to report that at least in one place, the trend is in the other direction.  I have written in the past about “sin taxes,” which are taxes on goods or services that are deemed socially undesirable.  According to an item in the November 12, 2012, Wall Street Journal, Denmark is not only doing away with a sin tax on foods containing saturated fat, but is cancelling plans to impose a similar tax on sugar:

Danish lawmakers have killed a controversial ‘fat tax’ one
after its implementation, after finding its negative
effect on the economy and outweigh the health benefits.

Products such as butter, oil, sausage, cheese and cream
were subject to increases of as much as 9% immediately
after the new tax was enacted.

The lawmakers also decided . . . to reverse an earlier
decision to create a sugar tax.

The fat tax was created in 2011 to address Denmark’s
rising obesity rates and relatively low life expectancy.

Many Danes have bought lower-cost alternatives, or in some cases hopped the border to Germany, where prices are roughly 20% lower, or to Sweden.

Wow, what a surprise: people didn’t like paying more for food, so they found a way to avoid the tax.  The tax ended up hurting the local economy without achieving the desired result of reducing saturated fat consumption.

Those disobedient Danes.  Don’t they know what’s good for them?



Any fool can make a rule, and any fool will mind it.

∞ Henry David Thoreau (1817 – 1862)