In a recent case issued from the United States District Court for the Eastern District of California, the Court held that a Trustee’s reliance on the advice of a CPA that no trust income tax return was due was enough to establish reasonable cause for such failure and thus avoid late payment and filing penalties.[1] Dolores J. Murphy (“Ms. Murphy”) became Trustee of the Charles M. Murphy Administrative Trust (“Trust”) upon the death of her husband in 2016.
Prior to her husband’s passing, the assets in question were managed in the jointly settled Murphy Family Trust which was established in 1993. The Murphy’s CPA, Mr. Chaltraw handled all of the Murphy’s tax reporting and reported all of the Murphy Family Trust income on their individual return due to the grantor trust status of the Murphy Family Trust.[2]
After Mr. Murphy’s death, Mr. Chaltraw continued to handle all of Ms. Murphy’s tax reporting. She continued to provide him with all of the requested forms and information. She relied on him to prepare the proper returns. Mr. Chaltraw did not mention any required filings for the Trust nor did he advise Ms. Murphy of any new obligations. Accordingly, no Trust returns were filed for the tax years 2016 and 2017.
In 2019, Ms. Murphy’s tax counsel discovered the error. Certain income, gains, losses, deductions, and credits of Trust were reported on Ms. Murphy’s individual 1040, and the gross income taxable to Ms. Murphy due to distributions from Trust had not been included on her individual return so it had gone unreported. Ms. Murphy stated that these errors were caused by “[Mr. Chaltraw’s] erroneous tax advice” to her in various her various capacities, including individually and as Trustee. Once discovered, Mr. Chaltraw took corrective action, including filing income tax returns for the Trust for 2016 and 2017. The late filings were picked up by the IRS, and the Trust was assessed late payment and late filing penalties.
Internal Revenue Code (“IRC”) § 6651 imposes a penalty on the failure to file and/or pay tax due.[3] However, IRC § 6651 also provides an exception where it can be shown that such failure was “due to reasonable cause and not due to willful neglect.”[4] Under well-established case law, the taxpayer bears the “heavy” burden of proof and must show that he or she has both 1) reasonable cause, and 2) the failure was not due to willful neglect.[5] Willful neglect “may be read as meaning a conscious, intentional failure or reckless indifference.”[6] “If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause.”[7] The IRS did not allege willful neglect and conceded that point, so the issue came down to reasonable cause.
It is well known in the tax world that relying on a tax adviser to file a return that the taxpayer knows is due is not reasonable reliance as the filing of the return is a non-delegable duty.[8] However, “[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.”[9] Citing a prior case, the Court noted in Boyle that to require the taxpayer to seek a second opinion or question the tax adviser’s advice would “nullify the very purpose of seeking the advice of a presumed expert in the first place.”[10] Accordingly, “reliance on the opinion of a tax adviser may constitute reasonable cause for failure to file a return.”[11]
In its response, the IRS cited to a number of cases in which the plaintiffs knew of their tax filing obligations, but failed to adhere to them due to relying on the agent to file the return. As noted above, the filing of the return is a non-delegable duty. However, Ms. Murphy’s case is different, as she relied on her tax adviser to let her know what her filing requirements were, and she was never aware the Trust was required to file an income tax return for 2016 and 2017 until it was discover in 2019, at which point she took corrective action. The Court noted that the fact Ms. Murphy was not aware “that she had a new obligation, as trustee of the Administrative Trust, to file a tax return on behalf of the Administrative Trust upon the conversion of the trust from revocable to irrevocable following her husband’s death” was a “fundamental distinguishment” from the cases cited by the IRS.[12] Given the distinguishment from Boyle and the similarities to Haywood Lumber, the Court ruled in Ms. Murphy’s favor that she did have reasonable cause for not filing the returns. Accordingly, Ms. Murphy satisfied both the “not due to willful neglect” and the “reasonable cause” requirements for the exception to penalties under IRC 6651.
So, what is the take away here? Cases like this always serve as a good reminder that relying on an agent to file a tax return is not enough to avoid penalties where they fail to get it done. If you believe your CPA is filing your return, and they don’t, you will be liable for IRC § 6651 penalties. However, where a tax adviser incorrectly advises you that no return is due, and you rely on that advice in not filing a return, you may be able to avoid such penalties provided you have provided the adviser with all relevant information needed.
[1] U.S. v. Murphy, 135 AFTR 2025-673 (E.D.C. 2025).
[2] See a prior article by Parker Durham discussing a grantor trust, though not in the same context as here, the Trust was revocable triggering grantor trust status under IRC 676. https://esapllc.com/intentionally-defective-grantor-trusts-have-your-cake-and-eat-it-too-2024/.
[3] IRC 6651(a).
[4] Id.
[5] U.S. v. Boyle, 469 U.S. 241, 245 (1985).
[6] Id.
[7] Treas. Reg. § 301.6651-1(c)(1); see also Boyle, 469 U.S. at 243.
[8] Boyle, 469 U.S. 241.
[9] Id.
[10] Id., citing Haywood Lumber & Min. Co. v. C.I.R., 178 F.2d 769, 771 (2d Cir. 1950).
[11] Id.
[12] Murphy, 135 AFTR 2025-673.
