A new federal district court case, Murphy v. United States, creates an important distinction in the long-established Boyle standard for penalty relief when taxpayers rely on tax preparers.
Case Background
When Charles Murphy died in 2016, his death converted a family trust from revocable to irrevocable, triggering new filing requirements. Neither his widow Dolores nor their longtime CPA recognized this change, continuing to report trust income on personal returns rather than filing separate trust returns for 2016 and 2017.
After discovering the error in 2019, Mrs. Murphy filed the missing returns and requested penalty relief. The IRS assessed approximately $145,000 in penalties, which she paid before suing for a refund.
The Court's Reasoning
The government moved to dismiss based on the Boyle rule, which holds that relying on an agent to file a return is not reasonable cause for late filing. However, the court found a crucial distinction: Mrs. Murphy wasn't aware of her new filing obligation in the first place.
Unlike Boyle, where the taxpayer knew a return was due but delegated the filing, Mrs. Murphy reasonably relied on her accountant to determine which returns needed to be filed following her husband's death. The court found this situation more similar to cases where taxpayers reasonably relied on professionals for substantive tax advice.
Key findings included:
- Taxpayers need not research complex trust tax law to exercise ordinary business prudence
- Mrs. Murphy had requested proper returns be prepared given her changed circumstances
- Her failure to review returns wasn't relevant since the error wasn't something she could reasonably detect
Implications for Tax Professionals
This case highlights several important considerations:
Proactive counseling: Discuss how major life events alter filing obligations, especially for clients with trusts.
Document advice: Distinguish between return preparation and substantive advice about filing requirements in your records. Engagements need to be clearly documented.
Clear communication: Explicitly explain new filing requirements when life circumstances change.
Penalty defense strategy: This case offers a roadmap for defending penalties when clients reasonably relied on professionals to determine their filing obligations following complex life events. Preparers may need to be aware for new clients but also to protect themselves from claims.
The case now proceeds to trial, but already provides valuable guidance on the limits of the Boyle standard when taxpayers rely on professionals to determine which returns are required—not just when they'll be filed.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
Subscribe to the TPN Newsletter!
Like what you're reading?
Subscribe to our FREE newsletter and we'll deliver content like this directly to your inbox.