Originally published on Forbes.com Aug 4th, 2014
Jonathan Haar’s victory at the Massachusetts Appellate Tax Board (download) is inspiring. I have no doubt that if Mr. Haar had been my client or friend, I would have told him to just pay the hundred bucks, but he fought and won without a lawyer. The hundred bucks that Massachusetts wanted was a penalty for extending his 2010 Massachusetts individual income by sending in a paper check.
Mr. Haar routinely extends his Massachusetts return, because he is in a Texas partnership. Good old waiting for K-1s. That’s why Mitt Romney had to extend his return. Of course, it is an extension of time to file, not an extension of time to pay. If you expect a balance due, you need to send some money in with the extension. That’s what Mr. Haar did. The problem is that, he sent in a paper check and if your extension payment is more than five grand, the Commonwealth don’t want your stinking paper check.
Why Is There An Electronic Filing Requirement?
Ms. Obrien-Horan of the Department of Revenue explained why the Department prefers electronic filing:
Ms. O’Brien-Horan testified that the mandate at issue in this appeal — requiring individual taxpayers who apply for an extension with an accompanying payment of $5,000 or more to file and pay electronically — is helpful to DOR because it maximizes up-front revenue intake. According to Ms. O’Brien-Horan, the $5,000 threshold was chosen because it would “impact 17% of the taxpayers, but get … the money banked for 84% of the revenue.” She elaborated that when DOR analyzed the population of taxpayers that would be affected by the $5,000 threshold, it determined that 98% of such taxpayers were already filing using a software package, so DOR “didn’t think would be too burdensome.”
Well that’s cool. I always like to see another instance of the Pareto Principle (80/20 rule) at work.
Reasonable Cause
The $100 penalty can be waived, if the taxpayer has a reasonable cause for not filing electronically. That was the heart of the case. Mr. Haar had a reason, but it was not something DOR considered reasonable.
Mr. Haar maintained that the Commissioner’s electronic payment mandate is a “serious invasion of both privacy and personal business practices,” as it exposes his finances to risk of cyber attack. On his abatement application, Mr. Haar explained, “I intentionally do no electronic banking nor direct bill paying, I have none of my credit cards linked to my bank accounts directly and I think anyone who does any of the above is exposing themselves to multiple risks of cybercrime and identity theft.” At the hearing, Mr. Haar testified that he does not link his “bank account information in any electronic way to any other electronic medium” because he believes it is a “very foolish thing to do.” Mr. Haar further expressed doubts as to the security of the computer systems used by the Department of Revenue (“DOR”), noting that “if the Pentagon can be hacked,” he had little confidence that DOR could protect his — or any other taxpayer’s — personal data from theft.
So Mr. Haar does not do any electronic banking, at all, ever.
And The Court Finds That Reasonable
Applying that “objective standard” to the facts of the present appeal, the Board found and ruled that the appellant demonstrated reasonable cause for failing to comply with the Commissioner’s electronic payment mandate. The Board found credible the appellant’s testimony that it was his consistent practice to avoid electronic payment of all bills, not just his tax obligations, and to keep his bank account information separate from his e-mail and other electronic media. The Board further found that his concerns regarding the electronic transmission of his personal financial data to be reasonable in these circumstances, given his reference to the hacking of the Pentagon’s computer systems and in light of the many well-publicized instances of large-scale thefts of financial information following computer security breaches at businesses and other institutions.
There Was Another Way
It occurred to me that Mr. Haar had another way around this problem. Massachusetts accepts paper checks with quarterly estimated tax payments. So rather than send in more than $5,000 with his extension he could have just sent in a late fourth-quarter estimated payment in a separate envelope. I’m grateful for him not taking the easy way out because I really like the precedent set by this case.