With all the complexities and confusion associated with IRS tax law, it is common for even the most sophisticated taxpayers to hire an IRS attorney or accountant to wade through difficult tax issues (such as IRS Penalties) and help prepare tax returns. But relying on tax advisers will not guarantee the IRS won’t assess penalties if you take a tax position the agency challenges.
While IRS tax lawyers are quick to point out that interest charges on back taxes typically can’t be waived, claims that you’ve relied on a tax adviser to avoid penalties may be a different story, under the right circumstances. For example, IRS tax attorneys say that if your tax adviser is an employee there is a good chance your reliance on his/her tax advice will not be sufficient to escape IRS penalties (see Seven W. Enterprises, Inc. et al.). If, however, your tax adviser was an independent, outside tax adviser the outcome may be different.
IRS attorneys explain to avoid penalties the government is going to ask whether your adviser was a competent professional with sufficient expertise to justify your reliance. Of course, the government will also want to know if you provided your tax adviser with all the necessary and accurate information needed to provide competent advice. And ultimately, IRS tax lawyers say the government will want to know if you actually relied in good faith on the adviser’s judgment.
Assuming you can prove all of the above, there is a good change you may be able to avoid IRS penalties. That’s particularly important as tax penalties can be very costly. In fact, the accuracy-related penalty is 20% of the back taxes owing, and under certain circumstances IRS attorneys say the penalty may go up as high as 40%. Avoiding penalties can mean saving hundreds, thousands, or even millions of dollars.
In some cases, a tax adviser may be deemed to be a “promoter.” IRS tax attorneys say a promoter refers to a tax adviser who actually participated in structuring the questionable transaction; or who is somehow otherwise connected to the transaction by way of an interest in or profits from the questionable transaction. In the case of Tiger’s Eye Trading, LLC v. Commissioner, a taxpayer’s reliance on a lawyer and accountants who structured the transaction and profited from its implementation was not sufficient reliance in “good faith” to avoid penalties. In a humorous passage contained within the Tax Court’s opinion, IRS attorneys say the Court wrote “promoters take the good-faith out of good faith reliance.”
In the end, it is your responsibility to ensure your tax returns are accurate and that you take appropriate positions under IRS tax law. If you need help, consider hiring an independent, competent, outside tax lawyer. It may save you some money if you wind-up making a mistake.
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