Willett v. United States

Background

Donald and Andrea Willett sought a refund of penalties assessed by the Internal Revenue Service for their 2014 federal income-tax return. They gave their tax documents—including original K-1s, W-2s, and 1099s—to certified public accountant Anne Goode in August 2015, before the October 15, 2015 filing deadline. The Willetts alleged that Goode became seriously ill, told them she would complete the return after leaving an extended-care home, and stopped responding to their later attempts to contact her. They also alleged that other accounting firms declined to help and that they could not find a certified public accountant until June 1, 2016. They filed the return on September 26, 2016.

The Internal Revenue Service assessed a $34,712.55 late-filing penalty and a $6,238.63 late-payment penalty. The Willetts paid the penalties and interest in full by March 31, 2017, then filed an administrative refund claim on August 31, 2018. After the United States moved to dismiss, the court gave the Willetts leave to amend to address why they could not obtain their tax documents and whether that circumstance sufficiently justified their late filing. The Willetts filed a first amended complaint, and the United States moved to dismiss it.

Legal standard

On a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), a complaint must allege enough facts to make the requested relief plausible. The court generally accepts the complaint’s factual allegations as true and draws reasonable inferences for the nonmoving party. A taxpayer seeking a refund bears the burden of showing that the assessment was incorrect and establishing the correct amount owed.

Under 26 U.S.C. § 6651(a)(1) and (2), late-filing and late-payment penalties generally apply unless the taxpayer shows that the failure resulted from reasonable cause rather than willful neglect.

Late-filing penalty

For a late-filing penalty, reasonable cause requires the taxpayer to show that the taxpayer exercised ordinary business care and prudence but was nevertheless unable to file on time. The court relied on the rule that a taxpayer’s reliance on an agent, including an accountant, does not by itself establish reasonable cause for a late filing.

The court concluded that the Willetts’ allegations showed reliance on Goode but did not show reasonable cause. Their detailed efforts to contact Goode did not provide an excuse for failing to file other than reliance on their agent. The court also considered, but did not decide, whether a Ninth Circuit exception for a taxpayer who was “disabled from complying timely” could apply to individual taxpayers. The court held that, even if the exception applied to individuals, the Willetts had not adequately alleged facts satisfying it. Their allegations that Goode possessed the original documents and that other accountants would not take them as clients did not show that they were disabled from filing on time.

Late-payment penalty

The court separately dismissed the claim concerning the late-payment penalty. Financial hardship can sometimes support reasonable cause for late payment, but the taxpayer must show extraordinary circumstances; evidence of financial trouble alone is insufficient. The Willetts relied on the same allegations for both penalties, and the court found that Goode’s illness did not address the Willetts’ personal responsibility to pay their federal tax liabilities on time. The Willetts therefore did not allege facts showing extraordinary financial hardship or another basis for refunding the late-payment penalty.

The court also noted that the amended complaint referred to the Administrative Procedure Act and the Declaratory Judgment Act in its jurisdictional statement, but did not plead claims under either statute. The opinion did not decide those arguments because the Willetts did not plead such claims.

Disposition

Judge Charles R. Breyer granted the United States’ motion to dismiss. The court dismissed the amended complaint with prejudice, meaning the claims could not be refiled in another amended complaint in this action. The court denied further leave to amend because the Willetts had already amended after receiving instructions about the deficiencies, and another amendment was likely to be futile.