Wayne Lee, a Florida surgeon, hired CPA Kevin Walsh to prepare and file his tax returns. From 2014 through 2016, Wayne provided Kevin with all necessary documents and signed Form 8879 e-file authorizations each year. As far as Wayne knew, Kevin was doing exactly what he’d been hired to do: preparing and filing returns, each showing mid-six-figure tax liabilities but also substantial refunds due.
Wayne discovered the truth on December 5, 2018, when an IRS agent showed up at his office. Kevin had never filed any of those returns. He’d never told Wayne about a software issue that supposedly prevented e-filing. The IRS notices had piled up at an incorrect address that Kevin promised but failed to update. By the time Wayne discovered the problem, the three-year statute of limitations had expired on his $288,000 refund from 2014. Instead of rolling that refund forward as planned, Wayne ended up paying $289,000 to the IRS in 2019 to settle unpaid liabilities, penalties, and interest.
Wayne sued Kevin (settling out of court) and the federal government for a refund. The government won.
In a recent episode of Tax in Action, host Jeremy Wells, CPA, EA, uses Wayne’s case to explore a principle the Supreme Court established decades ago: you can delegate tax return preparation, but you can’t delegate responsibility for filing deadlines. Understanding this distinction and the penalties that follow when taxpayers miss deadlines is crucial for tax professionals and their clients.
How Failure to File and Failure to Pay Penalties Work
The penalties Wayne faced were calculated additions to tax that accrued interest and turned a potentially manageable balance into a serious financial burden.
The failure to file penalty under IRC Section 6651(a)(1) is the more severe of the two delinquency penalties. It’s 5% of the net amount due for each month or fraction of a month the return is late. That “fraction of a month” language carries real weight. File your return one day late, and you owe a full month’s penalty. The penalty maxes out at 25% of the net amount due, unless fraud is involved. In fraud cases, the penalty jumps to 15% per month with a 75% ceiling.
“The net amount due means the tax liability shown on the return less any withholding credits, estimated payments, or any other payments made on or before the due date,” Wells explains, emphasizing a critical point. This definition, from IRC Section 6651(b)(1), means even if you can’t file on time, making payments reduces the base amount for penalty calculations.
The failure to pay penalty under IRC Section 6651(a)(2) is gentler at 0.5% per month, but it comes with its own trap. As Wells explains, “An extension of time to file is never an extension of time to pay.” Treasury Regulation 1.6081-4(c) makes this explicit. That six-month extension gives you time to finish the paperwork, not time to find the money.
When both penalties apply, as in the case of an unfiled return with an unpaid balance, they don’t stack. The failure to file penalty gets reduced by the failure to pay amount, keeping the combined rate at 5% per month. But both count as “additions to tax,” meaning interest accrues on the penalties themselves, compounding the total amount owed over time.
The math drives the strategy. As Wells puts it, “Why pay 5% when you only have to pay 0.5%?” Always file on time, even with a balance due. Always request extensions if you need more preparation time. And make estimated payments before April 15th to reduce the net amount due that serves as the penalty base.
Partnerships and S Corporations Face Different Rules
Pass-through entities don’t pay income tax directly, so there’s no failure to pay penalty. But their failure to file penalties can be devastating.
Under IRC Sections 6698 (partnerships) and 6699 (S corporations), the penalty is an inflation-indexed amount per partner or shareholder, per month the return is late. For 2025, that’s $245 per partner or shareholder, increasing to $255 in 2026 and $260 in 2027.
Wells stresses the multiplication effect. “By definition, a partnership has at least two partners. So if you have a late 1065, then at a minimum, the penalty will be doubled.” A small partnership with four partners and a three-month late filing would owe nearly $3,000 in penalties for 2025.
The penalty amount is determined by the year the return should be filed, not the tax year of the return. So if you file a 2024 partnership return late in 2025, you use the 2025 penalty amount.
Relying on Your Tax Professional Won’t Save You
Wayne’s defense seemed reasonable. He hired a licensed CPA, signed e-file authorizations, provided all documents, and was repeatedly assured his returns were being handled. Surely that demonstrates ordinary business care?
The courts said no, following precedent from United States v. Boyle (1985). In that case, the Supreme Court reversed an appeals court that sided with a taxpayer whose attorney missed an estate tax filing deadline. The Supreme Court held that taxpayers cannot delegate filing and payment deadlines to professionals.
When Wayne’s case reached the 11th Circuit in 2023, his attorneys argued that e-filing changes this dynamic. If only the professional can electronically submit returns, doesn’t that shift responsibility? The court rejected this argument entirely. “E-filing does not change the taxpayer’s duty,” they ruled.
So what actually qualifies as reasonable cause? The IRS outlines acceptable categories in Internal Revenue Manual 20.1.1.3.2:
- Death or serious illness of the taxpayer, immediate family member, or key employee within an organization (not an outside professional)
- Fire, casualty, or natural disaster directly causing non-compliance
- Legitimate inability to obtain essential records after reasonable efforts (poor recordkeeping doesn’t count)
- Reliance on erroneous written IRS advice specifically addressing your situation
- Ignorance of the law, but only if you had no prior filing requirement, tried to learn the law, and the issue was genuinely complex
Wells notes a crucial limitation: if you’re “demonstrably competent enough to carry on other transactions,” like hiring and working with a tax professional, “reasonable cause won’t work.”
The message is clear: tax professionals can prepare returns and provide advice, but the legal duty to ensure filing and payment remains with the taxpayer.
First-Time Abatement Is Your Best Shot at Relief
While reasonable cause rarely succeeds, taxpayers have another option that’s often more accessible: First-Time Abatement (FTA).
The IRS evaluates penalty relief requests in a specific order, outlined in IRM Chapter 20:
- Correction of IRS error
- Statutory and regulatory exceptions
- Administrative waivers (including FTA)
- Reasonable cause
Notice that FTA comes before reasonable cause, even though reasonable cause is statutory. The National Taxpayer Advocate has criticized this ordering, but for taxpayers, it creates opportunity.
FTA covers failure to file, failure to pay, and failure to deposit penalties, but not the underpayment penalty. To qualify, you need:
- Clean penalty history for three prior years (no unreversed penalties)
- All required returns filed
- Tax paid or payment arrangement in place
A critical change occurred in March 2023. “If you have a taxpayer with a relatively small penalty and you don’t ask for first time abatement, and then the following year they get an even bigger penalty, first time abatement is not available because it should have been used on that first penalty,” Wells explains.
The old strategy of “saving” FTA for a potentially larger future penalty no longer works. Use it when you’re eligible, or lose it.
Timing matters for requesting FTA. You can’t abate a penalty before it’s assessed, so wait for the notice—typically a CP14 or CP162. Get Form 8821 or 2848 authorization from clients and check the box to have notices forwarded to your office. When the notice arrives, respond immediately or call the Practitioner Priority Service for faster resolution.
Good news is coming: the National Taxpayer Advocate announced that starting with tax year 2025 returns, the IRS will begin automatically applying FTA to eligible penalties. Until then, it remains a manual process.
Protecting Yourself and Your Clients
“Penalty abatement is really less about proving innocence and more about understanding the timing, the procedures and how the IRS operates,” Wells says to summarize the episode’s overarching message.
For tax professionals, this means building clear communication into every client engagement. Clients must understand that while you prepare returns, they’re still responsible for confirming filing and payment. This isn’t about avoiding responsibility; it’s about accurately representing how tax law works.
Wayne Lee did everything a reasonable person would do, yet still lost nearly $600,000. His case is a reminder that in tax compliance, good intentions and professional help aren’t enough. The responsibility to file and pay on time ultimately rests with the taxpayer, and they can’t delegate that duty.
Listen to the full episode of Tax in Action for Jeremy’s’ complete analysis of IRC Section 6651, including detailed penalty calculations and step-by-step guidance for requesting abatement.