Your Money: The yummiest of the tax deduction : truffles

Michele Knight for SummitDaily.com writes: In perhaps one of the grayer areas of tax deductions, I often see bookkeepers and small business owners separate their meal expenses into a number of different categories. Usually, the list looks something like this: in-town, out of town, employee meals, business meals, travel meals and owner meals. I've seen this enough times that I decided it was worth doing a bit of research to clarify exactly what is allowed.

Why are meals such a cloudy area? The first reason is that they are only 50 percent deductible in most cases. So, there is an incentive to move certain meals into a category that gets a full tax deduction, rather than a reduced one. A 50 percent deduction means that if $100 is spent on a meal, the business only gets to deduct $50 of that expense. The IRS rationale, which does make sense to me, is that you would've eaten no matter what, so you cannot attribute the entire cost as a business expense, only a portion.

So, which meals are deductible? First, the meal must be determined to be directly related to the active conduct of a trade or business. You can leave this to your own interpretation, but generally business meals include employees, shareholders, vendors, strategic partners, customers, or potential customers of a business. This also includes any meal during business travel, as long as the trip is entirely related to business and is not personal in nature.

Once you've determined if a meal is deductible, next you need to consider whether it's 50 percent or 100 percent deductible. Since most meals are only 50 percent deductible, it's easier to focus on the few situations when you can fully deduct the meal. The largest of these expenses are company picnics or holiday parties, and in order to be eligible, the entire company needs to be invited and the event must be held on an infrequent basis (therefore, providing lunches once a week would not qualify).

Smaller examples of fully deductible meal expense are office snacks and bottled water, food provided to the public for free as part of a promotional expense, and meals provided as part of a charitable sporting event to raise money for the benefit of a 501(c)(3) organization.

When it comes to an employer providing meals to an employee, it gets a bit trickier. If the meal is provided on the employer's premise and to more than half of the employees, it is still only 50 percent deductible, unless it is provided in order to keep the employees working late, on the weekend, or they are required to be on call at that premises. Again, office lunches wouldn't qualify, but bringing in a late night meal because the employees needed to work extra hours to finish a project would fit the description.

Best practices say that you should keep all receipts for meals and document who attended the meal and what was discussed right on the receipt (although I've never had an auditor request that level of detail). It makes sense to track meals into two separate categories, 100 percent and 50 percent, but based on the criteria above, most meals will end up falling into the partially deductible category.

Taxes 101: Can I Write Off My Tattoo?

Kathleen Richards for Eastbay Express writes: First off, to answer that looming question in the headline, maybe (believe it or not). But we'll get to that later.  For most, playing music is a money-losing endeavor. No one decides to become a musician in order to become rich, and those who do are quickly disabused of the notion once they actually realize how much instruments, gear, a rehearsal studio, gas, merchandise, and recording adds up to.

But when it comes to taxes, should a musician go through the trouble of trying to write off all these expenses? Well, it depends. "If you have income, then the IRS expects you to report that income. And if you're reporting income, then you have the right to identify offsetting expenses because you're only required to pay tax on the net income," said Rex Davis, a certified public accountant (and, full disclosure, my accountant) who practices in Lafayette.

Of course, when musicians do earn an income playing music, it's usually in the form of cash from venues or merch sales, and thus the inclination might be to not report it (and, by extension, their expenses), although legally they're required to. But if a venue gives a musician or a band a W9 to fill out, business manager and accountant Ryan Mattos urges them to not give a fake social security number in order to avoid the IRS. Giving a fake social is "the worst thing you can do," said Mattos, who works for a company in the Bay Area (which he didn't want to name) that specializes in business management and tax preparation for high-profile athletes and bands. "The IRS doesn't care what you're doing as long as you tell them about it." (The income will only be reported to the IRS if it's more than $600, for which a person will receive a 1099 at the end of the year, but technically speaking, the IRS wants people to report any amount they make.)

Some musicians may decide to report all income — even cash — despite the amount, in order to write off expenses, and to be totally legit. That's what San Jose-based DJ/songwriter Peter Christianson did when he released his first record and began to play bigger shows. Even though Christianson owed money at the end of the year, he figured he still owed less than he would have if he hadn't claimed his expenses. "That was a big benefit for me," he said. "The larger benefit might have been to not report it. But this is my job now. I want to do this legitimately."

For the IRS, the big question is whether the activity is a business or a hobby. A commonly held belief is that if expenses outweigh income for more than three years in a row, then the activity is considered a hobby. Not so, said Davis. In fact, he said he wasn't aware of any set number of years that someone can claim losses before triggering the suspicion of the IRS. "I've seen people lose a lot more money than [three years in a row] and never be audited," he said.

Generally speaking, said Davis, a musician needs to show that he or she is trying to make money and is approaching the endeavor in a business-like way — i.e., by having a business plan and consultants, and by showing efforts to make the business profitable. "If you can make that case then you're entitled to the losses and it's not a hobby," he said. Granted, having a full-time job might put the person at a higher risk for getting audited, Davis continued, and in recent years, the IRS has been cracking down on people with full-time jobs that have a side business that loses money every year. Davis has had two such audited cases, but in both, the client prevailed.

But say you're starting to make significant money at music (it's looking more like a business), and you've got a fair number of expenses you'd like to write off. If you're in a band, Mattos suggests setting up a partnership. "Getting a tax ID number as a partnership is easy and cheap and can help them more than anything else," he said. However, he cautioned against doing so if the members aren't set in stone. "Because if a band starts and its four guys and a year later one gets kicked out, that guy legally owns a quarter of the band. Sometimes a band will offer the guy a lump sum — he'll get a quarter of the royalties down the line. But that's lawyer shit, and way more expensive than accountants."

If the makeup of your band is a little more tenuous, Davis recommends filing as a sole proprietor and keeping track of all income and expenses in QuickBooks or a similar accounting software program. Paying expenses with a credit card or check is the best way to keep a paper trail, but one should also take note of mileage for travel expenses, specifically the beginning and ending odometer readings, the date, the destination, and the business purpose.

So what about tattoos? The IRS allows expenses that are considered "necessary and ordinary" — a nebulous phrase, said Davis. "If you can demonstrate that the essence of the persona of the performer, in order to fulfill that persona that makes them interesting and successful as a performer, is tied to a certain presentation, then the taxpayer and the accountant can argue that it's a legitimate business deduction." He said similar cases come up in regards to cosmetic surgery for actors and actresses, and the IRS has ruled both in their favor and against. "Whether a particular person could do that with a tattoo I think is a stretch," Davis continued, "but I'm not saying there's not cases where you might try to defend it."

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Tradeshift’s Analyst Day: Intuit and QuickBooks / Where this partnership is heading...

 Before reading, be mindful of what Tradeshift is:  Tradeshift rethinks invoicing & payments (with a web based platform). In establishing a platform for all your business interactions, it helps smaller companies run more efficiently, harnessing the power of their network to create new value from old processes. Apps like e-invoicing become a route to getting paid faster or even open doors like dynamic discounting.   In January  tradeshift announced a partnership with Intuit Inc.

Jason Busch for Spendmatters.com writes Thirty minutes into the morning, Intuit’s Eric Dunn (who has been with Intuit since the provider’s early days) took the stage. Eric is responsible for Intuit’s commerce network solutions. Part of his charter (and the broader Intuit strategy) is focused in part on moving accounting from the desktop to other areas, including the space that exists between buyers and suppliers. This is where the Tradeshift investment and partnership comes into play.

It’s important for Intuit to defend its turf, where it has a dominant market position. Eric shared, among other metrics, that Intuit has 90% market share in small business finance (through QuickBooks products). As not entirely happy QuickBooks Online users ourselves (the online site has odd outages which brought our back office down and has changed its Mac browser support policies over the years) the parent company of Spend Matters is a good test case to provide a gut check on usefulness of where Intuit is headed with its Tradeshift partnership.
Yet Intuit still has to prove the basics of consistent uptime to long-time users like us (it’s been our accounting system since 2004). As we observed at the end of 2011:

It’s a pity that Intuit has had so many issues keeping the service up and running for subscribers like us. Just this week, we’ve even had to resort to manually writing checks because we can’t access the system. And don’t get us started on not being able to invoice customers … Coming from the software as a service (SaaS) and cloud world, we know that growing sites and services will always have outages. .. [Yet Intuit is not] communicating with customers and keeping them proactively informed over a multi-day and week period [of outages].

QuickBooks uptime has improved since then, at least for our business. But the question customers should ask is what’s next for Intuit and small business accounting? Will the tool transcend the basic general activities it enables today?

Eric noted that “connectivity” is a part of the strategy, including touch points with Mint (on the consumer finance side), payroll, and related areas (provided by Intuit). But enterprise connectivity (“ERP endpoints” as Intuit calls it) with SAP, Oracle, NetSuite and others is a broader opportunity that Intuit intends to tackle with Tradeshift to connect small business accounting users with larger customers (and each other).

Earlier this morning, Intuit’s Eric Dunn shared his thoughts on Tradeshift and the rationale behind the partnership and “strategic” investment his firm made in the e-invoicing network/platform upstart. In short, Dunn summarized that Tradeshift addresses the space that exists between QuickBooks users to build connectivity with enterprise counterparts. He also suggested that Tradeshift has:

• A compatible vision to “eliminate paper-based transactions, simplifying business and bringing the world closer together.”
• Modern technical design – “Service oriented architecture, extensible platform approach, mobile centric UI, etc.”
• Customers/clear market traction – not just a strong vision or underlying product/platform
• An “impressive” team

Dunn reiterated that Intuit is “not a financial investor,” but is seeking to partner “with a company with a fast growing network” where it can dedicate resources to integrate the products/services. Currently, Intuit has assigned four resources to the joint development projects and “hopes to have product” in customer hands by year-end.

The vision for bringing the Tradeshift platform together with QuickBooks extends to supplier enablement/on-boarding. This includes when a QuickBooks user “sets up a supplier for the first time, the system knows they’re on the network” and does not require new information to be entered. The goal is to drive increased supplier participation and connectivity.

Another goal is to avoid “supplier fatigue,” such as when QuickBooks users do “double data entry” by using eProcurement supplier portals to enter invoices, but also do manual data entry into QuickBooks. “They do it because they have to, but they’re not happy,” Dunn observers, regarding this all-too-common phenomena.

The partnership, in part, aims to overcome this type of AR double-duty that small businesses face when working with large customers using eProcurement and e-invoicing tools by linking transactions through the Tradeshift platform. This will start first with invoices but will move into POs and other document types, Intuit suggests.

The IRS can help you look after the kids (Summer Day Camp Tax Deductions)

Kay Bell for BankRate.com writes: Most working parents are well aware they get a tax break to help cover the costs of sending Jimmy or Janie to day care. But some parents overlook the tax advantage of summer day camp costs. During school vacations, many parents turn to these supervised programs to provide child care while they work. Overnight camps don't count, but the Internal Revenue Service says day camp expenses do qualify for this popular credit.
Regardless of whether you paid for after-class child care during the school year or a week of day camp during summer break, you can apply the costs to the child and dependent care tax credit and use it to cut your tax bill at filing time. And while this credit also applies to care for dependents other than children, there are limits -- on what you spend as well as how much you earn -- that reduce the actual amount of the credit. Plus, you must make sure you and the person being cared for meet IRS eligibility guidelines.  In addition to summer day camp, here are some care services that are eligible for the credit.

Care services eligible for credit

• Private home nurses.
• Licensed dependent-care centers.
• Nursery school and kindergarten costs. In these cases, if the costs of school are separate from child care expenses, only the child care portion qualifies.
• Household help as long as the services are necessary for the well-being and protection of the qualifying individual.

Actual care cost limits

The first thing to keep in mind is that the credit probably will not pay for all of your child care costs. The IRS limits the dollar amount you can claim and you only get to count a percentage of that amount.  You can claim only up to $3,000 for the care of one person and $6,000 for two or more. Then this amount is further reduced based on your overall income (more on this later).
There is some good news, however. If you paid someone to watch over your two (or more) kids, you can combine all your care costs to reach the $6,000 limit.
In the case of Janie and Jimmy, their folks could count the $2,800 for Janie's care and $3,200 for Jimmy's in order to claim a total of $6,000, instead of only $5,800 by adding $2,800 plus $3,000. By using the total amount rather than splitting the actual costs and then applying the limits and figuring the credit, they'll get a larger tax break.

Percentage restrictions

The second limit is the percentage of costs that you can claim. Once you determine your allowable expense amount, your actual credit is limited to a percentage of that figure.
So regardless of how much you pay, the potential maximum child and dependent care credit is $1,050 (35 percent of $3,000) for the care of one person, twice that for two or more. Depending upon your income, the percentage range drops from 35 percent to 20 percent of your allowable care costs.
The 35 percent rate is only for lower-income taxpayers. If you make more than $15,000, the credit percentage is incrementally phased down by salary range until it hits 20 percent for those earning more than $43,000.
And even if your care costs come up to the maximum credit amount, you may not get it all if your tax bill is less than your allowable credit. The dependent care credit is not refundable, meaning it can only take your tax bill to zero. Any excess credit is not usable.
For example, if you claim a $1,050 maximum credit for the care of one child and owe $750, the IRS will use your credit to wipe out your tax bill, but you won't get the extra $300 as a refund.

Defining dependents

If you pay for child care, you can claim this credit to help offset some of your costs as long as your child meets IRS guidelines.
The youngster must be younger than 13. He or she also must meet the requirements set out in the IRS' dependent requirements. Basically, this means the child must be related to you and live with you most of the time. There are exceptions in the cases of divorced or separated parents, so read the tax filing instructions carefully or consult your tax adviser if this is your situation.


But the child and dependent care credit is not limited to child care costs. It also can be claimed when you pay for care of other dependents as they are deemed qualified by the IRS. For example, if you pay someone to look after your spouse or a dependent of any age who is incapacitated because of physical or mental limitations, you might be eligible for this tax break.

Only working taxpayers need apply

Then there's the credit's job catch. You can only claim dependent care that was necessary so that you can go to or look for work.

If you're married, the IRS requires both of you to be employed or seeking a job. The only exception is when one spouse is either a full-time student or is physically or mentally incapable of self-care.
After clearing the employment hurdle, other requirements to claim the credit include:

• A filing status of single, head of household, married filing jointly or qualifying widow or widower with a dependent child. In most cases, married taxpayers who file separate returns cannot claim the dependent care credit.
• The payments for care cannot be made to someone you can claim as your dependent on your return or to your child who is younger than age 19.

To claim child and dependent care credit, complete and attach Form 2441 to your return. You must file taxes using either Form 1040 or Form 1040A to claim the credit.

Identify your caregivers

You also must include on the tax forms the name and taxpayer identification numbers of the caregivers.
If it's a business, the operator can provide you with the employer identification number. You also can use Form W-10, Dependent Care Provider's Identification and Certification, to request this information from the care provider. For individual providers, you generally use the person's Social Security number.
You might have some additional filing duties related to this credit depending upon who you hire and how you cover the costs.
If you pay someone to come to your home to provide the care, you may be considered a household employer and have to pay employment taxes.

Company benefit considerations

Finally, if you received any dependent care benefits from your employer during the year, you will have to complete Part III of Form 2441 or Schedule 2 to determine the amount of your credit. These amounts are listed in box 10 of your W-2.
Company benefits include money you receive directly from your employer or that was paid by your employer to your care provider. The fair market value of a company-provided day care facility also counts, as does money you put into a dependent care flexible spending account to pay care expenses.

For example, if your company provides untaxed dependent-care benefits directly to you, those amounts reduce the amount of expenses you can claim. If the company pays you $1,000 for child care costs, you must reduce your credit amount by that payment, so a $3,000 limit now becomes $2,000 to offset the company payments.

In the case of a spending account, if you paid $10,000 for a nursery school to look after your two children while you were at work, $6,000 is the maximum allowable credit amount. But you used $5,000 from your workplace flexible spending account to pay part of those costs, so the account money will reduce how much you can claim toward the child care credit -- the $6,000 maximum care expense amount is cut to $1,000.

In both these instances, because the workplace child care assistance is not taxable income to you, you cannot use those amounts to help further cut your tax bill.
More information on the credit is available in IRS Publication 503, Child and Dependent Care Expenses, or Chapter 32 of IRS Publication 17, Your Federal Income Tax.

XERO : The US payroll landscape and our vision (look out Paychex & ADP)

Mark Pinard for Xero writes: I distinctively remember my first job out of college, the start of my career, the start of my adult life. I had taken a sales representative position at an up-and-coming online payroll company known as PayCycle Inc. (US version).

In those days there was still a large contingency of people who viewed the Internet as a scary black hole where your lifes deepest secrets can be easily exposed. Needless to say, I was a little skeptical as to how in the world I was going to sell anything related to the internet, nevertheless a payroll product.
Turns out that when you have a pretty great product that really can help improve the lives of small businesses owners, it’s more convincing than selling. We were fortunate enough to convince quite a few people and with the success of that product, the landscape of what a payroll product is in the US, began to change.

A payroll market absolutely saturated by the large full service companies now had a chihuahua biting at its ankles. As technology began to bloom so did the DIY payroll solutions. Small business owners previously forced into a price arm wrestling match now had the might to win; they had other options. There was finally an answer to a niche market of small business owners looking to save money on payroll. The market now provided solutions that could fulfill all the payroll needs of a small business but at a quarter of the price. Creating a DIY product that is easy to setup, use, keeps the IRS at bay, and is inexpensive are all major challenges but many companies were still looking to cash in on the new movement.

Fast-forward to 2013 and I find myself embarking on a new adventure but with the same challenge, to alter the landscape of US payroll yet again. This time as a product marketing manager with a few more gray hairs and some great insight on what it takes to deliver a top-notch service. It becomes even more ironic knowing that Xero purchased Paycycle (Australia), a DIY payroll solution designed to fulfill the needs of Australian small businesses. Although the Australian Paycycle has no relation to US PayCycle, both have the same core value of the customer experience being a number one priority.

The backbone of a great payroll product is already there but so is the challenge of localizing it for the US. Xero’s core focus is to revolutionize small business and that is exactly what we intend to do by adding a US payroll feature. Provide an all in one accounting and payroll solution that instantly makes a small business more efficient and productive. Gone are the days of exporting and importing, logging into separate services and double entry. Xero is poised to deliver one solution that will revolutionize the way you run your small business.

Xero has already delivered a revolutionary, customer centric focused accounting and payroll product in Australia. Duplicating this established brand value in the US is no easy feat, especially given all the complexity that US payroll introduces. As we take the initial steps in building a Xero payroll product here in the US, we understand the necessary features required in order to be successful, but the number one thing we understand is that we need to stay focused on our customer and their experience.

Our goal is to develop a simple product, which is easy to setup, easy to use and consistently delights our customer. The difference that separates Xero from the rest of the pack is that we are 100% focused at maintaining that model. We want to build a payroll product that remains simple, and regardless of its growth, keeps that simplicity to continually deliver; yep you guessed it, the best customer experience possible. Beautiful accounting software meets beautiful payroll, an all in one solution that changes the landscape of US payroll yet again.

We’re looking for payroll developers to join our team in San Francisco. If you’d like to help us please get in touch on our careers page.

Anna 
1 March 2013 #

When will the U.S customers expect to see the Payroll feature introduced?

Lynne Taylor 
3 March 2013 #

Mark, this is just fabulous! Thanks for the blog post and the perspective from a former “Paycycler” – I have loved and been using the Paycycle app for many years and never miss a chance to tell my clients that they should be using Paycycle instead of ADP or Paychex, which are – IMHO – both more expensive and less user friendly than Paycycle. I was dismayed when Intuit bought the company, but have been hanging on hoping that a product with at least as many great features – and hopefully more! – would come along and be seamlessly integrated with Xero. Since Xero has obviously hit a home run with its beautiful accounting software, I know many of us in the “cloud accounting” community in the USA are anxiously awaiting a beautiful payroll product too. I’m not a programmer but if you need any help, insights or anything else, I’m happy to provide it! 

Scott 
5 March 2013 #

Any news on when Payroll can be expected / is coming to Xero for existing UK customers or have you forgotten about us and moved across the pond for commercial reasons?

Stuart McLeod 
5 March 2013 #

Hi @Anna, no time frames as yet, but we’ll be sure to post here with some more information when we’ve got some more detail to share.

@Lynne, lovely to hear that you’re looking forward to it as much as we are!

And @Scott, no, we’d never forget. At the moment, we rely on our add on partners in all jurisdictions other than Australia, but we’ll be sure to update here when we have some more detail.

Innocent Spouse Relief : QUESTION: If I signed a joint tax return with my husband and the return was audited by the IRS and I had minimal or no knowledge of my husband’s business or work activities, will the IRS hold me personally liable for the taxes due?

Dennis M Hasse writes: Spouses who file joint income tax returns bear the joint liability for the taxes, interest and penalties that may arise from their return. This means that each spouse is responsible for full payment of the tax shown due on the joint return. But experience has shown that strict observance of the joint liability rule may prove to be unfair, where one spouse is without any knowledge of one or more items on the return or an item is erroneously reported on the return; it would be unfair to hold that spouse liable for the tax liability due for that item. The innocent spouse rules exist to protect that spouse from tax liability in these situations.

There are three kinds of relief available to the innocent spouse from the joint liability for filing a joint return.

A. First, under the Internal Revenue Code, a joint filer may seek innocent spouse relief from joint liability if:

• There is an underreporting of tax due to an erroneous item of non-innocent spouse filing the return;
• The innocent spouse can prove that in signing the return she did not know and had no reason to know that there was an underreporting of tax on the return;
• It would be unfair to hold the innocent spouse liable for the tax deficiency based on her facts and circumstances; and
• The innocent spouse chooses to apply for innocent spouse relief within two years from the date the IRS attempts to collect the tax.

If the above conditions are met, the innocent spouse will not be liable for the tax, interest and penalties due for erroneous items on the return.

B. Second, under the Internal Revenue Code, innocent spouse relief may be available for spouses who become divorced, legally separated or were not members of the same household after a joint return has been filed.  This provision generally allows an innocent spouse to opt to be liable for only that portion of the tax deficiency attributable to that spouse’s income.  For example, if the wife works, she would owe tax only on her income. Specifically, this provision requires that the innocent spouse seek innocent spouse relief no later than two years from the date the IRS sends a notice. The spouse who is seeking innocent spouse relief must meet one of the following conditions:

• At the time the spouse seeks innocent spouse relief by filing a request with the IRS, the innocent spouse must be divorced, widowed, or legally separated from the other joint filing spouse.
• The innocent spouse must not be a member of the same household as the other joint filing spouse at any time during the 12 month period prior to asking for innocent spouse relief.

C. Third, under the Internal Revenue Code, innocent spouse relief may be available if the spouse is not eligible for relief under A and B above, because it would be unfair to hold the spouse liable under the particular facts and circumstances.  Generally, the IRS will grant innocent spouse relief where it would be unfair to hold the innocent spouse (requesting spouse) liable, if following requirements are met:

• The spouse seeking innocent spouse relief is no longer married to, or is legally separated from, the other spouse, or has not been a member of the same household as the other spouse at any time during the 12-month period prior to asking for innocent spouse relief.

• The spouse seeking innocent spouse relief had no knowledge or reason to know that the non-innocent spouse would not pay the income tax.  She must show that it was reasonable to believe that her husband would pay the reported tax.

• The innocent spouse will suffer economic hardship if relief is not granted.

Estate Tax / A Trap for the Unwary ... Extended Filing Deadlines for Estate Taxes

Joseph J. Ecuyer for Bloomberg BNA writes: In the normal income tax setting, applying for an extension of time to file your income taxes means that you must also estimate and pay your tax liability by the original due date (typically April 15th).  If the taxpayer pays at least the amount that will ultimately be calculated as due, in the event that the taxpayer cannot file his/her return by the extended due date (typically October 15th), the taxpayer need not worry about the failure to file penalty or the failure to pay penalty as those penalties are calculated with reference to the amount of the late payment.

As the recent case of Young Est. v. U.S., No. 1:11-cv-11829-RWZ (D. Mass. 12/17/12) illustrates, however, taxpayers and their representatives must exercise more care when dealing with meeting the extended estate tax filing deadline, if the taxpayer also requested and extension to pay the estate tax.

In Young Est., the decedent died on August 14, 2008.  The estate's tax return and tax payment were originally due on May 14, 2009. However, the estate submitted timely requests for extension of time to file and extension of time to pay; those requests were granted, which made the estate's tax return due by November 14, 2009, and the Estate's tax payment due by May 14, 2010.  The estate made a partial payment of $760,000 towards its tax liability on May 14, 2009, before the original payment deadline expired. It made a second payment of $2,200,000 on August 31, 2009, after the original payment deadline but before the extended deadline. That second payment satisfied the balance of the Estate's tax liability as estimated when the request for extension of time to file was made.

During 2009, the real market crashed and property values plummeted.  During this period, the estate obtained appraisals of its properties, but believed that the appraisers' estimated values were substantially higher than the fair market value at the time.  Instead of filing its return on the extended filing date of November 14, 2009, upon advise from its tax advisers, the estate decided to wait until the properties were sold, and then file a single late return. The estate's tax advisers believed that, because the estate had already paid more than its eventual tax liability, there would be no penalty for filing late. They therefore advised the estate to ignore the filing deadline and just file a single late return, because they believed filing a timely but inaccurate return and then an amended return would be better than filing a single late return—especially since it would simplify any subsequent audit.

Unfortunately, the estate's tax advisers were wrong. Filing its return after the extended filing due date had the effect of voiding the extension to make the estate tax payment.  And, therefore, even though the estate had paid the full balance on August 14, 2009 (nine months before the extended payment date), the estate owed a late-filing penalty calculated from the original due date of the return.  The IRS assessed a late-filing penalty of $259,325.85 plus $20,774.30 interest.

The estate paid the penalty and filed a request for refund with the IRS, on the ground that the estate had reasonable cause for filing late because it relied on expert tax advice. The IRS denied the refund request. The estate then filed a penalty appeal with the IRS, but again failed to obtain relief. Finally, it brought this suit in district court.  However, the district court held that estate was liable.  According to the district court, relying on substantive tax advise (as opposed to relying on an adviser to perform a ministerial act, such as actually filing a return) does not constitute reasonable cause for which a taxpayer would be excused from the penalty.

The lesson here is that tax advisers should be extremely careful when advising their clients that they do not have to meet certain deadline.  In all likelihood, the adviser was thinking about the effect of filing a late return (when full payment has already been made) in the income tax context.  In the estate tax context, the same rules do not apply when the taxpayer has also filed for and been granted a request to extend its payment obligation.  This is true even where the estate pays the full amount of the tax prior to the extended filing date, as the Young Est. case illustrates.