Tax Court Rejects Argument That Software Was to Blame for Failure to File Forms 8300

(Parker Tax Publishing May 2025)

The Tax Court held that an automobile dealer did not establish reasonable cause for failing to file multiple Forms 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, and thus was liable for penalties assessed by the IRS. The court determined that (1) the taxpayer failed to establish that the software it relied on to file the required forms did not perform as intended, and (2) the taxpayer failed to establish that it had adequate controls in place to identify noncompliance issues. Dealers Auto Auction of Southwest LLC v. Comm'r, T.C. Memo. 2025-38.

Background

Dealers Auto Auction of Southwest LLC (Dealers Auto) is an Arizona limited liability company with its principal place of business in Colorado. In the ordinary course of its business, Dealers Auto receives cash payments for purchases of vehicles and accepts installment payments. These payments sometimes exceed $10,000 either individually or in the aggregate with respect to a series of related payments.

Code Sec. 6050I provides that any person who is engaged in a trade or business and who, in the course of such trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions) must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, with respect to such transaction (or related transactions). In addition, Code Sec. 6050I(e) requires that the business also furnish a statement to the person from whom the cash was received. Failure to file these information returns can result in a penalty. Code Sec. 6721 imposes a $250 penalty for each return a taxpayer fails to file, not to exceed a total of $3 million for any calendar year, and Code Sec. 6722 imposes a $250 penalty for each return a taxpayer fails to furnish, not to exceed a total of $3 million for any calendar year.

In 2014, the IRS determined that Dealers Auto failed to file Forms 8300 and furnish payee statements and assessed penalties of $21,200 under Code Sec. 6721 and Code Sec. 6722. Dealers Auto subsequently purchased AuctionMaster software from Integrated Auction Solutions (IAS) to help it meet its IRS Form 8300 requirements. The manual for the software states that the software enables a user to print Forms 8300. Separately, the manual describes the Form 8300 function as being able "to print all IRS 8300 forms completed for a period." The manual does not indicate that the software automatically files any Forms 8300.

A subsequent audit by the IRS showed that Dealers Auto did not meet its Code Sec. 6050I filing obligations for 2016. One such failure was with respect to filing Forms 8300. Dealers Auto's new system generated 116 Forms 8300 for 2016, but the IRS calculated that it should have filed an additional 266 Forms 8300 and assessed penalties of more than $118,000. Dealers Auto was not aware of its failures and only became aware of the problem when the IRS began its audit.

Dealers Auto reached out to IAS and learned that IAS made improvements to its Form 8300 module system in an update administered in June of 2017 (after the year at issue). The changes included an improved payment aggregation system to better track payments made by a single representative across multiple dealerships. The update also improved tracking of transactions where payments were made in a series of related transactions. Dealers Auto implemented corrective actions and filing procedures for Forms 8300 and clarified its filing obligations with the IRS's exam personnel.

In November of 2019, the IRS sent Dealers Auto a Notice of Federal Tax Lien Filing and Your Right to a Hearing under Code Sec. 6320, relating to the penalties assessed for 2016. Dealers Auto promptly submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing, on which it challenged the underlying liability. Specifically, it sought a reasonable cause penalty abatement, arguing that it relied on the IAS AuctionMaster software but the software did not perform as intended. The Appeals officer sustained the lien after explaining that reliance on software is an insufficient excuse "without utilizing checks and balances to identify any errors."

Dealers Auto took its case to the Tax Court. The IRS argued that, even if Dealers Auto relied on software, it would not qualify for the reasonable cause exception to the penalties because, under the Supreme Court's decision in U.S. v. Boyle, 469 U.S. 241 (1985), the failure to timely file a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not "reasonable cause" for a late filing under Code Sec. 6651(a)(1). However, Dealers Auto did not argue that it delegated to the software the obligation to file the required information returns. Instead, it argued that the software malfunctioned by failing to notify it that the returns needed to be filed.

The question before the court was whether Dealers Auto correctly used the software and reasonably relied on the software but nevertheless experienced a software error that unforeseeably delayed its information return filing.

Analysis

The Tax Court sided with the IRS and held that Dealers Auto did not establish reasonable cause for its failure to timely file all of its Forms 8300 for at least two reasons. First, the court said, Dealers Auto did not establish that the software failed to perform as intended and, second, Dealers Auto failed to establish that it had adequate controls in place to identify noncompliance.

With respect to the software's purported failure to perform as intended, the court said it was unclear from the record whether the supposed failure was a failure to create the required forms or a failure to file them. With respect to the communications between Dealers Auto and IAS on the software updates, the court observed that those communications referred to "improved" features and nothing in the record established that the software was failing to perform as intended. Further, the court said, while it was not necessary to show that Dealers Auto made every data entry correctly, the record offered no insight as to Dealers Auto's installation, training, or use of the software.

With respect to Dealers Auto's failure to establish that it had adequate controls in place to identify noncompliance, the court noted that Dealers Auto's software prepared only 116 Forms 8300 in 2016 but was required to file at least 212 Forms 8300 in 2014. According to the court, that reduction in the number of forms should have placed Dealers Auto on notice that its software was not performing as intended. And since Dealers Auto offered the court no explanation as to why the reduction in the number of forms would have appeared reasonable, the court was not persuaded that Dealers Auto reasonably relied on its software.

Finally, the court said the penalties could have been avoided if significant mitigating factors existed, such as when a filer either was never previously required to file that particular type of return or had an established history of complying with the information reporting requirements with respect to which the failure occurred. As the court observed, however, neither of those specific mitigating factors existed in this case.

Practice Tip: It's important to note that the Tax Court found unpersuasive the IRS's blanket arguments that reliance on software cannot establish reasonable cause or, alternately, that the duty to file an information return is a nondelegable duty. According to the court, software malfunctions can qualify as a failure beyond the filer's control when it is shown that the filer used the software correctly. And while there is support for the position that the act of filing is a nondelegable duty, the court observed that the IRS had not identified any authority for the proposition that relying on software to instruct the filer of when a filing obligation arises cannot rise to reasonable cause. The court also found that Reg. Sec. 301.6724-1(c)(1)(ii) and the Internal Revenue Manual indicate that computer failures beyond the filer's control can be relied upon for purposes of the reasonable cause defense to a failure to file an information return.

For a discussion of the requirements for filing Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, see Parker Tax ¶252,598.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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