It wasn’t my fault; my tax advisor said it was ok…

When you were in school and didn’t have your homework assignment ready to turn-in, did you ever tell the teacher “the dog ate my homework”? If so, did it work? Chances are the answer is probably not. IRS tax attorneys say the same is true when taxpayers tell the IRS they relied on their tax advisor; the excuse doesn’t always get you out of paying penalties.

When reviewing your tax return, if the IRS makes changes resulting in back taxes owing, it will usually add interest and penalties as well. While interest charges may not typically be waived, claiming you relied on your tax lawyer or accountant can be effective in eliminating penalties in some, but certainly not all instances.

One consideration as to whether your reliance on a tax lawyer or accountant may be successful in avoiding penalties deals with whether the advisor was independent, or your employee at the time the advice was given. In the case of Seven W. Enterprises, Inc. et. al. the U.S. Tax Court drew a distinction between “outside” versus “in-house” tax advisors.

The holding in Seven W. Enterprises, Inc. suggests that if the tax lawyer or accountant was an outside advisor, your penalty will likely be abated. When the advisor was in-house, however, the penalty will probably be applied. The case is particularly interesting as the advisor in both instances, was the same person working independently and in-house at different times for the corporate taxpayer. The Court applied the penalty when the advisor was in-house, and waived the penalty when the advisor was outside of the company working independently.

Other criteria the Court will consider, according to IRS tax lawyers, include whether the taxpayer provided the advisor with all of the relevant information; whether the tax lawyer or accountant was sufficiently competent to justify that taxpayer’s reliance; and whether the taxpayer relied in good faith on the outside tax lawyer or accountant’s professional judgment.

IRS attorneys point out that whether your reliance on the advice of a tax advisor is justified will also turn on such questions as your sophistication as a taxpayer; and the nature of the tax question which led to the IRS adjustment. These IRS tax lawyers suggest the more unsophisticated you are in dealing with tax matters, and the more complex and/or difficult the tax question, the stronger your arguments may be for relying on a tax lawyer or accountant’s advice.

So if you have questions about your taxes and need help, deciding to consult with an independent, outside tax lawyer or accountant is probably one of your best hedges against IRS penalties. But, make sure you shop around for a tax lawyer or accountant who is competent and well qualified to answer your specific tax-related questions.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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