June Tax Tip

A recent Tax Court case, McNair Eye Center v. Commissioner, T.C. Memo 2010-81, has held that reliance on a CPA is NOT a valid defense to the failure to file employment taxes. In this case, Dr. McNair hired a CPA in 2004 to tax care of all tax filing matters, including payroll taxes. The CPA failed to prepare or file the tax returns, and also failed to make tax deposits of the amounts withheld from the employees’ wages. Unfortunately, Dr. McNair did not realize these failures until the CPA left his employment in 2006.

The IRS assessed penalties for the failure to deposit the withheld taxes, the failure to file the tax returns timely and the failure to pay the amounts due on the tax returns. The Tax Court upheld all three penalties, noting that the duty to file a tax return rests with the taxpayer and cannot be delegated to a third party for purposes of the late-filing penalty. The Court also noted that it was Dr. McNair’s responsibility to check on the CPA and make sure that all work was being done properly, especially given that the CPA was hired after Dr. McNair had already had problems with the filing and paying of these tax returns. The Court held that the failure to monitor the tax filings and the progress of paying was an indication of the lack of “ordinary business care and prudence” such that all of the penalties were appropriate.

This case should make it very clear to all taxpayers that the duty to file is theirs alone and cannot be delegated. Thus, it is important to keep tabs on any tax professional that you hire, either for you personally or your business.